Some states could tax Biden’s student loan relief

MINNEAPOLIS (AP) — President Joe Biden’s student loan forgiveness plan could lift crushing debt burdens from millions of borrowers, but the taxman may require reducing the relief in some states.

That’s because some states tax debt as income, meaning borrowers who are still paying off student loans could owe taxes on up to $10,000 or even $20,000 taken out of their account. In Mississippi, Minnesota, Wisconsin, Arkansas and North Carolina, forgiven student loans will be subject to state income taxes unless they change their laws to comply with a federal student loan tax break, according to a count of Washington Tax Foundation. DC based think tank.

That frustrates Kathy Newman, a Louisiana State University graduate who just took a job teaching freshman biology at the University of Southern Mississippi in Hattiesburg. He thinks he could end up owing a few hundred dollars that he could keep if he stayed in Louisiana.

Newman said she can come up with the cash because she has a good job, but she knows many other borrowers who will still be stuck in financial straits even after their loans are forgiven.

“If they stay in the state, they could end up with a pretty big tax burden if things don’t change,” Newman said. “I won’t be happy if I have to. I can do it. But a lot of people can’t.”

More than 40 million Americans could see their student loan debt reduced or eliminated under the forgiveness plan Biden announced late last month. The president is writing off $10,000 in federal student loans for people making less than $125,000 a year or households earning less than $250,000. It waives an additional $10,000 for those who also used federal Pell grants to pay for college. But it only applies to those whose loans were paid off before July 1, which leaves out high school students who will follow them.

While eliminating $10,000 or $20,000 in loan payments will be a long-term benefit to eligible borrowers, those in affected states may have to report it as income. Depending on a state’s tax rates, the taxpayer’s other income, and the deductions and exemptions they can claim, they could add up to several hundred additional tax dollars owed.

IRS officials in several states — including Virginia, Idaho, New York, West Virginia, Pennsylvania and Kentucky — told The Associated Press that their states would definitely not tax student loans made under Biden’s program. . Revenue officials in some other states said they needed to do more research to know.

Newman, 38, went into debt to pay for graduate school. He was already set up for relief under the federal public service loan forgiveness program, though that requires five more years of teaching beyond the five he already taught at the University of Louisiana at Monroe. Biden’s plan would shave $10,000 off her debt when it takes effect, but under Mississippi’s existing tax law, the relief won’t be free.

“It’s not a huge burden for me, but it could be for a lot of other people, which is something I worry about, especially if it’s unexpected, and I think a lot of people don’t realize that,” Newman said. .

Any relief to states that would tax forgiven debt would have to come from their legislatures. Leaders of the Minnesota Legislature and Democratic Gov. Tim Walz have indicated in recent media interviews that there is broad support for a fix, which could come during the 2023 session or even earlier in the remote possibility of a special session.

In Wisconsin, Democratic Gov. Tony Evers’ administration plans to propose a fix to the state budget next year, but that would have to be approved by the Republican-controlled legislature. And Evers must be re-elected in November before he can formally make that request. Republican legislative leaders and Evers’ GOP challenger, Tim Michels, did not return messages seeking comment on the student loan tax issue.

But in Mississippi, the chairman of the state Senate’s tax committee said he’s willing to take a look when the legislature meets next year. Republican state Sen. Josh Harkins, of Brandon, said he needs to learn more about what his state’s tax laws say about debt forgiveness.

“I’m sure people will want to adjust this or make some changes in the law, but there are a lot of factors that need to be considered,” Harkins said, noting that Mississippi enacted its largest tax cut earlier this year and adding that it wants to gauge the impact of inflation before making major tax policy decisions. “It all hit in the last week.”

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Binkley reported from Washington, D.C. Associated Press Writers Emily Wagster Pettus in Jackson, Mississippi, and Scott Bauer in Madison, Wisconsin contributed to this story.

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