When Joe Biden announced that the government would be forgiving up to $10,000 in student loans for millions of Americans, he committed the country to what the Penn Wharton Budget Model (PWBM) said is a $329.1 billion price tag over 10 years.
That puts taxpayers on the hook for about $2,000, according to the National Taxpayers Union Foundation. And while some may argue the taxpayers won’t actually bear that cost, the NTUF argues that, well actually, they will in some way.
Some may dispute that taxpayers bear the cost of canceling student debt. But the $329 billion cost of student debt cancellation would be $329 billion previously borrowed from the federal government and not returning to the Treasury. Policymakers will need to make up for that gap in the future with government spending cuts, tax increases, more borrowing, or some combination thereof.
If past is prologue, the Administration and Congress will charge student debt cancellation to the taxpayers’ credit card. Further, a one-time forgiveness does nothing to address the underlying causes of education costs and student borrowing for current and future students.
The problem, though, isn’t just the taxpayer burden down the road. What many Americans may not understand is that, unless their state Treasury Departments temporarily change the rules, that loan forgiveness will be treated as income and taxed.
Under U.S. tax law, when a loan is forgiven, the borrower is send a 1099 form, which shows the forgiven amount. That is then treated as taxable income and the government subsequently taxes it.
The American Rescue Plan, passed by Congress and signed into law right at the beginning of the Biden Administration’s term, barred the IRS from taxing loan forgiveness through 2025. So Biden’s plan won’t make your federal taxes go up immediately. But the same may not necessarily be true in your state.
While Biden’s student loan forgiveness won’t trigger higher federal taxes, you may still be on the hook for state levies, said higher education expert Mark Kantrowitz.
Some states automatically conform to federal rules, but others may count the forgiven balance as income, meaning it’s still possible you’ll have a bill. The amount “may be the equivalent of a few student loan payments,” Kantrowitz said.
If you’re unsure, contact a local tax professional for an estimate before filing your state tax return.
You have absolutely nothing to worry about if you live in states with no state income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Several other states tend to match their income tax rules to federal rules, but they will need to clarify if their rules are up to date with the new rules laid out by the American Rescue Plan.
So, if you don’t live in one of those states, you may want to reach out to your accountant, or call your state’s Treasury Department and see what the rules are going to be for you. And, if you end up having to pay extra in state income taxes, be sure to remember that Joe Biden swore up and down that he wouldn’t be raising your taxes.