Student Loan Forgiven? The Tax Man May Be Coming…

So, you've qualified for the elimination of $10,000 in your student loan debt. That's good for you, but it still might cost you. Due to President Biden's use of executive action to cancel up to $10,000 in student loan debt for most borrowers, and $20,000 for Pell Grant recipients new tax issues could arise. People qualify based on income of less than $125,000 or $250,000 for married couples. According to The Tax Foundation, based on estimates from the Penn Wharton Budget Model, that would cost at least $330 billion and potentially closer to $500 billion.

Here's the catch, under the current federal law, the tax code handles debt forgiveness differently depending on the borrower’s repayment plan. That is, canceling student loan debt will have new and potentially complicated tax consequences for borrowers. Basically, your "windfall" of 10k, taken away from the student loans you owed, could be considered taxable income in your state.

For example Wisconsin, and 12 other states, have the potential to tax discharged student loan debt, though the final count could be significantly smaller if states make legislative changes or determine as an administration that the debt forgiveness can be excluded, or if "conformity dates are updated retroactively", that's according to Washington D.C. think-tank, The Tax Foundation. However, states could make legislative changes or administratively determine that the debt forgiveness can be excluded, or if conformity dates are updated retroactively. Wisconsin Legislature last updated its state tax code to conform with federal code through Dec. 31, 2020. That was just months before Congress passed the American Rescue Plan Act exempting student debt discharge from being taxed.

According to the report, consumers who receive the full amount of student forgiveness in Wisconsin could see an increase of taxation by $530. In addition these amounts could be doubled for Pell Grant recipients.

In addition, this plan also extends the pause on repayments “one final time” through the end of the year, 2022. According to StudentLoanPlanner.com that costs $5 and $10 billion per month, including interest pause costs and impacts on existing loan forgiveness programs; like, income-driven repayment plans and the Public Service Loan Forgiveness Program.

Either way, be prepared Wisconsin student-loan borrowers, you may be taxed, just as you were getting ahead of those bills.