Debt Forgiveness

On August 24 The White House announced President Joe Biden’s Student loan forgiveness plan. Millions of student loan borrowers will be eligible for $10,000 in loan forgiveness or even up to $20,000 if they received Pell Grants. To qualify, borrowers need to make under $125,000 per year, if married under $250,000 per year.

The loan forgiveness would eliminate the student debt for 16 million borrowers, according to the Center for American Progress. Not only on the loan forgiveness plan, Biden is also acting on extending the student loans to the end of the year. Forbes recently said Biden’s administration will also soon be releasing details on a new income-driven repayment plan that will cut payments for undergraduate federal student loan borrowers by 50% or more existing plans.

The loan forgiveness is not taxable at the federal level but at the state level things tend to get more complicated. Most states abide to what happens at the federal level but for some states that is not the case. There are 13 states that could treat this lone forgiveness as a taxable income and those are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia West Virginia, and Wisconsin.

In states that chose to act on the loan forgiveness as a taxable income, borrowers could pay anywhere from $300 to over $1,000 in state taxes and the numbers could double for Pell Grant recipients.