Whether you’re for it or against it, the question of what should be done about the almost $2 trillion in student loan debt spread amongst almost 50 million borrowers is a point of political contention. Some people say that we should leave things as they are, and let people figure out how to manage their own student loan debt. Others say that all of the student loan debt should disappear and give all borrowers a clean slate. Finally, those remaining have varying ideas of exactly how much student loan forgiveness is ideal. Wherever you fall on the spectrum, you can probably agree that student loan debt, or lack thereof, has profound effects on the state of the country.
The fact of the matter is that the train of student loan forgiveness has already left the proverbial station. On August 24th of this year, the current administration announced the following plan for partial student loan forgiveness:
- To be eligible for forgiveness, you must have federal student loans and earn less than $125,000 annually (or $250,000 per household) for 2020 or 2021.
- Borrowers who meet the above income criteria can get up to $10,000 in student loan debt cancellation.
- Borrowers who received a Pell Grant during their time as an undergraduate are eligible for an additional $10,000 for a total of $20,000 forgiven.
- Eligible borrowers will apply using an online portal that has come available as of October 27th.
- Eligible borrowers with federal loans will see the forgiveness applied to their accounts in summer of 2023, as a one-time adjustment.
While most current student loan borrowers will be excited about their future lower student loan balances, it is important for them to be aware of the tax implications of this new student loan forgiveness program.
Though under normal circumstances the federal taxability of student loan forgiveness depends on a number of different factors, this specific program benefits from a provision in the American Rescue Plan Act that exempts student loan forgiveness from federal tax until 2025. The tax-exempt status of the student loan forgiveness is crucial because without it, those who received student loan forgiveness would otherwise potentially be faced with thousands in additional tax liability.
On the state level, the taxation of the most recent tax forgiveness plan will vary based on the jurisdiction of the taxpayer. States that follow the American Rescue Plan Act will exempt the new loan forgiveness from state taxability.
Most states have excluded this student debt forgiveness from their state income tax bases; the following states have indicated that they will levy income taxes on the cancellation of debt income from this new student loan forgiveness program:*
- North Carolina
Even though only tax lawyers and accountants get excited about taxes, it is important to understand them and how to navigate the rules that govern them (or hire a professional who does). Filing returns improperly or failing to file returns can land you in hot water with the IRS. If you do happen to slip up and need guidance with dealing with the IRS, please feel free to contact the attorneys at The Wilson Firm: we are happy to be of assistance.