Does Your State Forgive Student Loans? See Which States Will Forgive and Which Won’t
- Student loan forgiveness is here, but many people don’t know what it means for them.
- At this time, student loan relief is available for those in the public sector, with Pell grants, and others who were conned by for-profit institutions.
- There will likely be issues for some states, especially for those who have not passed legislation to protect student loan borrowers from taxation.
- Most people will be exempt from taxation, even at the federal level at this time.
Student loan forgiveness is here, but some challenges might be due to some states deciding to tax student loans that are forgiven. This can be very confusing for those not up to date with what’s happening.
This article will provide everything needed to understand student loan forgiveness and see which states will forgive and which ones will not. There will also be a discussion of whether federal government taxation can curb some people’s worries regarding student loan forgiveness.
There will always be more updates regarding the situation, especially as student loan forgiveness becomes more apparent as the applications become available during the fall. First, however, let’s begin with the issue of taxation and who will be liable for taxes on their loans.
Student Loan Forgiveness Will Cost Some Individuals
Depending on where you live, student loan forgiveness will cost some individuals more because certain states have not created legislation to protect students from the issue of taxation. In certain situations, student loans that have been forgiven are subject to taxation unless otherwise stated.
Reports have stated that people can expect to pay anywhere from $300 to $1000 if they live in a couple of different states, mainly because taxation for this would be relatively low compared with other loans that are forgiven.
Unfortunately, many of these states have not discussed the issue of legislation to help borrowers, thus, showing that, at least for this year, student loan forgiveness will be taxed to some extent. A little more than a handful of states present this issue to their borrowers.
Where is Student Loan Forgiveness Taxed?
As it stands today, there are a few specific states that have no legislation in place that would create the issue of potential taxation. Here are the states that had no legislation as of recently to protect forgiveness of student loans from taxation:
- New York
- South Carolina
- West Virginia
These states have no legislation to forgive student loans without taxation. Yet, it’s essential to note that certain states have discussed or are in the process of creating specific legislation that change this issue.
Based on that fact, multiple different states have improved their handling of student loans and allowed for forgiveness. However, not all have.
From the above list, the following states have agreed and passed laws or will be passing laws that will eliminate the taxation process for these student loans.
- New York
- West Virginia
These states are currently proceeding with legislation to help these students avoid taxation or have already created legislation. They will have it enacted by the time student loans are officially forgiven in the fall, or by the time tax season arrives next year.
What if My State Is Not on This List?
People shouldn’t be too worried about the states that aren’t mentioned in either of these lists. All other states are going to proceed with forgiveness without taxation, as President Biden has stated previously. That means that more than 40 states will fully allow for nontaxable forgiveness, which is a win for individuals who are still in school or currently paying off their loans.
Why Would Student Loans Be Taxed If They Are Forgiven?
People often ask why student loans can be taxed if they are forgiven. It’s a confusing situation, but federal law and state law might have the answer. Certain debts are not forgivable; if they are, there is still taxation based on the category under which they fall.
For example, certain medical debts are typically treated similarly to student loans, as this is not taxed due to it not being considered income. Student loans can only be taxed if they are categorized with other loans that are considered income.
It’s somewhat confusing but this is how the legislation works. Therefore, certain states now have different rules regarding what will happen and how they will protect their students.
Is This Taxable on a Federal Level?
Many people might wonder if student loans are taxable at the federal level, given that there’s so much confusion at the state level for specific populations. However, people will sigh in relief when they hear that federal student loans at the national level are not taxable if they are forgiven.
There was recently a law passed in 2021, titled the American Rescue Plan Act, which created $1.9 trillion in funding for various areas of focus, but also explicitly focused on eliminating taxation for student loan forgiveness. Thus, due to this foresight by President Biden, student loan forgiveness is not taxable at the federal level but only for select states.
Can Student Loan Forgiveness Be Taxed in the Future?
Fortunately, people can feel a sense of relief knowing that after this, any student loan forgiveness would likely be nontaxable at the federal level due to the legislation stating that it is protected until 2025.
That means if President Biden wants to continue forward with more student loan forgiveness, it will continue to be tax-free, saving many people hundreds of dollars that they would otherwise have to pay to the government.
What About After 2025?
Beyond 2025, who knows what might happen! Student loans do have the potential to be taxed after this point if they are forgiven unless another legislative document is passed that helps to protect it even further.
At this point, there is no way to tell, but for the current situation, people will mostly be free from taxation and have a bit of relief knowing that most of their student loans are officially gone.
Are You Going to Be Taxed on Student Loan Forgiveness?
Student loan forgiveness is a significant step in the right direction, but some of us might be taxed. Are you one of those who will be taxed for student loan forgiveness? Let us know in the comments down below!
For more information about student loan forgiveness and to get a head start on your application, check back frequently. We will keep updating news as it becomes available so that you get a head start on getting your student loans forgiven and getting yourself on track to getting debt free.