On August 24th, President Biden announced a plan to cancel thousands of dollars of student loan debt for millions of Americans. The plan included forgiving $10,000 in debt for those earning less than $125,000 per year and $20,000 for those that received Pell grants.
As one of the President’s campaign promises, student loan forgiveness has been a long-discussed topic, including determining who is eligible and whether forgiveness is taxable.
Many people assumed that since canceled, forgiven, or discharged debt is typically taxable per the IRS, this would be the case for Biden’s student loan forgiveness. According to higher education expert Mark Kantrowitz and CNBC, $10,000 in forgiveness would trigger $2,000 in taxes for the average borrower.
But due to The American Rescue Plan of 2021, which was created to provide financial relief to Americans during the COVID-19 pandemic, student loan forgiveness is not federally taxable until at least 2025.
But that doesn’t extend to the state level, and there are states that are planning on taxing it.
According to the Tax Foundation, an independent tax policy nonprofit established in 1937, the below states are on track to tax student loan debt forgiveness - as of September 7th, when the list was last updated. These states are predicted to tax student loan debt due to existing policy alignment with the IRS and statements from state officials.
As officials announce changes, this list could shift.
At MRPR, we've received many questions on the tax implications of student loan forgiveness. But student loan forgiveness is a major boon to millions of Americans and will likely affect your business either directly or indirectly - so we've covered some of the most common questions regarding how student loan forgiveness will play out below.
The adjusted gross income limit to determine taxability is raised to $250,000 per year for couples filing taxes jointly.
Like most interactions with federal student aid, you may assume you'll have to file a lengthy application filled with an abundance of personal information. Luckily, the "Biden/Harris" administration is taking measures to make the student loan forgiveness process as simple as possible.
According to StudentAid.gov, nearly 8 million borrowers may be eligible to receive student loan forgiveness without applying, if the U.S. Department of Education already possesses your relevant income data.
If your information is not already accessible by the U.S. DOE, an application will be required, but the Biden Administration says that applicants won't need to upload any documents or even enter their FSA ID.
Since Pell Grant recipients can receive an additional $10,000 in forgiveness, borrowers may be particularly interested in whether they received one.
Pell Grants are awarded to undergraduate students with "low or moderate income." According to the Biden Administration, "nearly every Pell Grant recipient came from a family that made less than $60,000 a year." Most borrowers will be able to log in to StudentAid.gov to review the aid they received, including Pell Grant information.
Current students can qualify for loan forgiveness. If the students are dependent, their eligibility will be based on parental income.
According to the Biden administration, this forgiveness will affect approximately 43 million borrowers and completely wipe out the debt of 20 million. For those that will still be paying back the remainder of their debt, the White House has introduced changes to their income-driven repayment plan to reduce monthly payments for lower and middle-income borrowers.
Student loan relief will be greeted with open arms by the millions of middle and low-income students affected, but as some details are still unannounced, MRPR will be keeping an eye on the developments moving forward to better assist you in navigating these big tax and income changes.
On October 17th, President Biden announced the application for the student loan relief program is now live.
The application is open until December 31st, 2023, and is quite straightforward. It requires your name, social security number, date of birth, phone number, and email.
"It's easy. It's fast," Biden said in the press conference announcing the application's launch. "This is a game changer for millions of Americans to get moving."