Newsom Says California Won’t Tax Biden’s Student Loan Forgiveness, Saving Borrowers An Additional $1.3 Billion

Mandatory Credit: Photo by Rich Pedroncelli/AP/Shutterstock (13447308b)California Gov.
Rich Pedroncelli/AP/Shutterstock / Rich Pedroncelli/AP/Shutterstock

California Gov. Gavin Newsom recently announced a proposal via press release, on Nov. 5, that would ensure Californians receiving federal student loan forgiveness would not have to pay state taxes on the amount that is forgiven under President Joe Biden’s program. The proposal would save Californian borrowers up to $1.3 billion in prospective taxes and will be part of the governor’s budget, which will be released in January, according to the press release.

“Californians who get student debt relief shouldn’t be hit with taxes for it. This will provide up to $1.3 billion in tax relief for more than 3.5 million Californians,” Gov. Newsom detailed in the release. “I look forward to working closely with the legislature to get this done through early action.”

Under the Biden plan, up to $10,000 in federal student debt relief may be offered to borrowers whose income in 2020 or 2021 was less than $125,000 (or $250,000 for households). That figure rises to a potential $20,000 in student loan cancellation for Pell Grant recipients. If you are a dependent student, your eligibility is based on parental income. Most federal loans are eligible — including undergraduate and graduate direct loans, parent PLUS and grad PLUS loans, consolidation loans, federal family education loan (FFEL) program loans held by the Department of Education, Perkins loans held by the same department, and defaulted loans, according to studentaid.gov.

California is home to roughly 3,550,000 eligible borrowers, of which an estimated 2,340,600 are Pell Grant borrowers, according to the release. By waiving state taxes on forgiven student loan debt, borrowers would save individually (on average) hundreds of dollars and as much as $1,860, per the release.

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Other states are taking the opposite approach, as Mississippi and Indiana have already confirmed the debt relief would be taxable, Business Insider reported.

Indiana borrowers will have to pay $323 in state taxes for $10,000 of student loan forgiveness and $646 for $20,000 of student loan forgiveness, according to the Indiana Department of Revenue.

On Nov. 5, the White House said that 26 million people have provided the Department of Education the required information to be considered for debt relief, and that 16 million applications have been approved so far.

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