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President Joe Biden’s student loan forgiveness program has sparked a flurry of questions, including its impact on inflation and whether it’s fair to saddle some taxpayers with the burden of paying off others’ debts. Now the Tax Foundation has raised another—will it trigger tax liabilities for beneficiaries of the scheme?
Taxpayers will absorb up to $10,000 in outstanding student debt for individual borrowers earning less than $125,000 per year or $250,000 for married joint filers under Biden’s plan, with the amount forgiven doubling to $20,000 for Pell Grant recipients.
While the debt wipeout is free of federal taxes, some states have laws that treat the canceled debt as taxable income, according to Jared Walczak, vice president of state projects at the Tax Foundation.
“Here’s one more question to add to the mix: will states consider student loan debt forgiveness a taxable event? In many states, the answer could be yes,” Walczak said in a note.
Walczak explained that, in general, canceling student debt is taxable because it counts as income. However, the American Rescue Plan Act (ARPA) stipulates that forgiven student loan debt is excluded from federal taxable income through 2025.
Many states follow the federal treatment of student debt discharge but some do not, he pointed out. Whether or not discharged student debt is taxed or exempt at the state level is based on how state laws interact with the Internal Revenue Code (IRC).
Some states conform to the IRC with ARPA or don’t fully conform to the IRC but adopt certain provisions of the ARPA that make forgiven student loans tax-exempt.
