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- Biden recently announced student-debt relief for over 800,000 borrowers on income-driven repayment.
- The American Rescue Plan said debt relief will not be subject to federal taxes through 2025.
- While most states adopted the same guidance, some states could tax the latest relief.
Student-loan forgiveness is starting to hit thousands of borrowers' accounts — but it might be subject to a state tax.
On Monday, President Joe Biden's Education Department announced it was beginning to discharge student loans for 804,000 borrowers as a result of a one-time account adjustment for borrowers on income-driven repayment plans. Through the adjustment, the department looked at the accounts of borrowers who have completed the required 20 or 25 years of qualifying payments on an income-driven repayment plan but had yet to receive the loan forgiveness the programs promised.
"When I came into office, hundreds of thousands of borrowers weren't accurately getting credit for student loan payments that should have delivered them forgiveness under Income-Driven Repayment plans or were placed into forbearance by loan servicers in violation of Department of Education rules," Biden said in a Monday statement.
"Under these plans, if a borrower makes 20 or 25 years' worth of payments, they get the remaining balances of their loans forgiven," he continued. "But because of errors and administrative failures of the student loan system that started long before I took office, over 804,000 borrowers never got the credit they earned, and never saw the forgiveness they were promised - even after making payments for decades."
Thanks to a provision in the American Rescue Plan, any loan forgiveness will not be included in gross income from 2021 to 2025, meaning that any relief borrowers receive would not be hit by a federal tax. However, states can choose whether to craft their tax laws in accordance with federal law — and while most states have chosen not to tax debt relief, some have.
Here are states that have confirmed they will tax Biden's latest student-debt relief:
- Mississippi
- North Carolina
- Indiana
- Wisconsin
- Arkansas — While a spokesperson for the Arkansas Revenue Department previously said that forgiven debts are expected to be taxed as income in the state, the state legislature could change that.
The Tax Foundation, a think tank that studies tax policy, wrote in a recent blog post that "while student loan forgiveness is generally included in taxable income, the current tax code contains a complicated patchwork of exceptions." Along with the varying state laws, the blog said that borrowers who receive debt relief through Public Service Loan Forgiveness are exempt from taxes, along with those who receive relief if their school closed down.
"From the standpoint of tax simplicity and neutrality, the rules regarding the tax treatment of forgiven loans should be consistent and broadly applied, rather than fragmented and preferential," it said.