- Six states are on track to forgive Biden’s student loan debt.
- The Tax Foundation’s Undivided Thinking Tax says some states may be blocking tax plans.
- If taxes are paid, borrowers can leave an average $500 bill for student loan relief.
Six states are poised to offer Biden student loan debt forgiveness, but one expert says the number could be lower.
Historically, any type of debt forgiveness or cancellation of debt has been considered taxable income at the state or federal level. But under America’s bailout plan, any student loan debt forgiveness between 2021 and 2025 will not attract federal taxes.
The debt relief is still triggering some states’ tax codes because they don’t all conform to the Internal Revenue Code (IRC) in the same way.
“Most states pretty much follow the federal tax code,” Jared Walczak of the Tax Foundation, a nonpartisan think tank, told Insider.
But most do so under a maintenance agreement — which automatically follows a change to the Internal Revenue Code — and some have a fixed-date agreement, he said.
This is where most of the state-by-state variation in student loan forgiveness comes from.
Indiana and North Carolina are the only states that have made active decisions about student debt and are excluded from the US bailout, Walczak said. However, North Carolina Governor Roy Cooper has called for the tax to be lifted.
In states including Arkansas, Minnesota, Mississippi, Wisconsin and California, plans to address the debt are largely due to older issues, Walczak said. He expects most residents to reform their tax code rather than leave them with more bills.
“It’s a smaller list, not a larger list at this point,” Walczak said.
“No action has been taken since the cancellation of student debt was announced,” he said. “Instead, we’ve had states trying to change the treatment for not paying taxes. I’ve heard from the legislatures in Arkansas, Mississippi, Minnesota, California and Wisconsin all talking about the possibility of reforming the law.”
California, for example, is more likely to adopt a provision that directly addresses the treatment of student loan debt under the IRC rather than allowing the relief to be taxable.
“California is an interesting state,” Walczak said. “The officials are hanging on a thin reading that they don’t know if they are paying taxes or not.”
Few believe the tax can be avoided under California’s existing rules, Walczak said.
“So we’ve seen legislative leaders say, ‘If it’s true, we’ll fix it.’
Any states that haven’t taken steps to avoid the additional tax could end up burdening borrowers with an average tax bill of $500, Walczak estimated.
