President Biden announced a new student loan forgiveness plan earlier this year that could impact millions of Americans struggling to pay off their student loans.
Eligible recipients may have up to $20,000 in student loan debt canceled, saving them thousands of dollars in interest and potentially absolving their debt altogether.
However, residents in a few states who receive this forgiveness may face a higher tax bill. So, before you apply for student loan forgiveness, tax debt relief, or another financial move, it is essential to know the potential implications.
Is student loan forgiveness really taxable?
Several states are considering taxing student loan forgiveness, which has traditionally been considered tax-free. This controversial move could significantly impact students struggling to pay off their loans.
If you have questions about this, it is understandable. The laws for taxes are complex, and even experts may question why a state taxes the forgiveness of debt. Essentially, it all comes down to whether or not a state considers debt forgiveness as a source of income.
The federal government has announced that the forgiveness of student loans will be exempt from federal income taxes, thanks to the American Rescue Plan. Most states have announced they will follow suit and exempt the forgiveness from state income taxes.
However, a few states have announced that they will treat, or plan to treat, canceled debt as taxable income.
States where student loan forgiveness could be taxed as income
- Mississippi – The Mississippi Department of Revenue has confirmed to multiple news sources that it will tax forgiven student loans.
- Minnesota – The Minnesota Department of Revenue has updated its website to reflect that student loans forgiven by President Biden’s executive order are subject to state taxes. However, other forms of student loan relief may still be taxable.
- Wisconsin – The Wisconsin Department of Revenue confirmed that under the state’s current tax laws, forgiven student loans are considered taxable income, and they do not have the authority to change the tax law. However, this may change as its upcoming budget request session with lawmakers will take place soon, but any changes will be for the 2023-2025 calendar years.
What to do if you live in one of these states and plan to apply for student loan forgiveness
While getting taxed on student loan forgiveness might feel frustrating, there is some good news. For one, the amount you’ll owe isn’t that high; you’ll most likely need to pay a one-time amount of around $500.
Reach out to your accountant or tax specialist if you’re still worried about the taxes you’ll owe. They can help you navigate these waters and minimize any potential penalties.
Also, participate in the legislative process by reaching out to your elected officials to let them know how their decisions affect you, a constituent. The more they hear from voters, the more they’ll have to pay attention to the ramifications of these decisions, especially come election time. Many thought the 2022 midterms would be a “red wave” of new Republican elected officials, but student loan debt relief became one of the key issues that prevented the GOP from grabbing too much power.
The bottom line
If you live in one of the states listed, it’s essential to know that student loan forgiveness may be taxable. This could significantly impact students struggling to pay off their loans, so stay informed and speak up if you have any questions. Tax professionals can help navigate these waters, and you can also reach out to your elected officials to let them know how you feel.