On August 24th, President Biden announced a plan to forgive student loan debt for millions of Americans. Individuals whose adjusted gross income in 2020 or 2021 was less than $125,000 ($250,000 for married couples) may receive up to $10,000 of federal student loan forgiveness. Pell Grant recipients may receive up to $20,000 in debt forgiveness. While not directly mentioned in the announcement, multiple news organizations have quoted the White House stating that Parent Plus loans are also eligible for forgiveness.
In addition to the loan forgiveness, the pause on federal student loan repayments and reduction of interest accrual has been extended through December 31, 2022. The announcement also caps monthly payments on undergraduate loans at 5% of a borrower’s discretionary income, which is half the amount under most income-driven repayment plans today.
The Education Department is expected to establish a forgiveness application which will be available no later than the end of the payment pause, scheduled for December 31, 2022. Generally, cancellation of student debt is reported as taxable income. However, the American Rescue Plan, signed into law in March 2021, allows for an individual to exclude student debt cancellation from Federal gross income through 2025, therefore, escaping federal income tax.
Although several states conform to Federal tax law, there are 13 states that could potentially tax the debt cancellation, including Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin. These states will need administrative change from their governor or the state tax department or new legislation to provide income tax relief at the state level.
We will be closely watching to see if these states take any action to conform to the Federal law.
You can read the White House’s fact sheet here
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