The Department of Education announced on Aug. 14 that automatic discharges would begin for 804,000 borrowers who qualify for $39 billion in student loan relief due to fixes to income-driven repayment (IDR) plans implemented by the administration. But if you live in certain states, you might have to pay state taxes on the relief.
The department added that borrowers are eligible for forgiveness if they have accumulated the equivalent of either 20 or 25 years of qualifying months.
“For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness,” Secretary of Education Miguel Cardona said. “By fixing past administrative failures, we are ensuring everyone gets the forgiveness they deserve, just as we have done for public servants, students who were cheated by their colleges, and borrowers with permanent disabilities, including veterans.”
Yet, as Business Insider reported, five states have announced they will tax the relief: Mississippi, North Carolina, Indiana and Wisconsin. As for Arkansas, the state previously said that forgiven debts are expected to be taxed as income, but the state legislature could change that, according to Business Insider.
The Tax Foundation explained in a blog post that while student loan forgiveness is generally included in taxable income, “the current tax code contains a complicated patchwork of exceptions.”
“The American Rescue Plan Act (ARPA) of 2021 temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025 under the rationale that a tax burden arising from treating forgiven student debt as income partially undermines debt relief,” according to the post.
In terms of who is eligible for that relief, the Department of Education said borrowers include those with Direct Loans or Federal Family Education Loans held by the department (including Parent PLUS loans of either type) who have reached the necessary forgiveness threshold as a result of receiving credit toward IDR forgiveness.
Student loan interest payments will resume on Sept. 1, 2023, while payments – which paused during the pandemic – will be due starting in October – a change that will put a dent in millions of Americans’ budgets, following the Supreme Court – in a 6-3 June 30 decision – struck down President Biden’s student loan forgiveness program.
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