Student loan debt forgiveness may come with a tax bill

Biden announced last month that he would cancel $10,000 in student loan debt for borrowers who make less than $125,000 a year. He said that 95% of borrowers, or around 43 million people, would benefit from the relief — but that some will have to pay taxes on it.

Video transcript

CODY HOUNANIAN: It is a real concern for us that some borrowers could get their student debt canceled and get taxed.

JARED WALCACK: Right now, at least five states are in line to tax this student loan debt forgiveness.

- President Biden's student loan forgiveness plan could erase thousands of in debt for millions of borrowers across the country.

- But depending on what state you live in, you might still have to pay up on tax day.

CODY HOUNANIAN: We have heard from some states, particularly those with more conservative leadership, that they feel they will be taxing borrowers. And we also know that there's other states who feel that they're not going to be taxing borrowers.

JARED WALCACK: This is because historically at both the federal and the state level any sort of debt relief or debt forgiveness is actually taxable income.

CODY HOUNANIAN: The federal government is not going to tax this relief. Lawmakers, led by Senator Schumer and others, passed a bill during the pandemic to make sure that the federal government never taxed student debt that was forgiven between now and 2025.

JARED WALCACK: Some states follow that. In fact, most do. But there are a handful of states that don't fully conform to the federal code or don't conform to this provision. And therefore, they're going to tax student loan debt discharge.

I don't think a lot of states want to tax this particular type of debt forgiveness either. Most of them already conform in ways that they won't do so. But for these remaining states, we'll have to see if there's some sort of solution in the works. But if you are a borrower and you're receiving $10,000 or $20,000 in loan relief, you're probably pretty happy about this even if you have to pay $500 or $1,000.

JOE BIDEN: If you make under $125,000, you get $10,000 knocked off your student debt. If you make under $125,000 a year and you received a Pell Grant, you'll get an additional $10,000 knocked off that total, for a total of $20,000 relief. 95% of the borrowers can benefit from these actions.

CODY HOUNANIAN: We've secured a big win through federal student debt cancelation from the president's action. And if we have to turn our focus to state governments to try to prevent unnecessary taxes, we will do that as well. The fight continues. This win is just the beginning on so many more issues that we're going to continue to address.