Tons of people are asking questions since the Biden administration passed an executive order to forgive $10,000-20,000 in debt per person(If you aren’t familiar with this legislation, you can read more about it HERE.) Since then, a common question we are hearing is: Is this forgiveness federally taxable? Usually, under Tax Law, any debt cancellation can be taxed by the federal government. It’s been that way for a long time. But, like the PPP loans were ultimately left untaxed over the pandemic, the federal student loan forgiveness is expected to be untaxed with some exceptions. 

What about state taxation? States have the right to create their own tax laws and not follow suit with federal tax laws. As you’ll remember from government class, every state has its own tax rules. As of this writing, seven states (Arkansas, Wisconsin, Minnesota, Indiana, Mississippi, North Carolina, and California) are planning to tax all federal student loan forgiveness. Could other states decide to tax their residents who have their student loans forgiven? Absolutely, and there are reports of different states contemplating that question, but we will have to wait and see how that plays out. 

I also wanted to address some recent legal action that was taken over the student loan forgiveness program. Arkansas, Iowa, Kansas, Nebraska, Missouri, and South Carolina have recently filed lawsuits against the Biden Administration. The claim is that those states would suffer financial damage if the forgiveness were enacted due to the loss of state tax revenue. And those states are not alone. An Indiana legal firm is also suing to stop the student loan forgiveness program.

Additionally, the six-state lawsuits allege that President Biden does not hold the authority to cancel federal student loan debt. The Department of Education and President Biden disagree, citing the 2003 Heroes Act. That law gives the Secretary of Education the control to reduce or completely forgive student loan debt during periods of national emergency. The COVID-19 global pandemic falls under this emergency umbrella, and it remains in effect today. According to the Department of Education, other Presidents have used this law to give financial relief to various debtors. It also established the initial forbearance for Federal Student Loan borrowers, and other student loan forgiveness.

It’s going to be interesting to see how this plays out. As of this writing, federal student loan borrowers were to begin applying for the loan cancellations, but a federal judge may stop that from happening as these lawsuits start to play out. 

If you have children or grandchildren that this program affects, I would advise you to keep an eye on this in case these legal actions cause some changes, and your loved ones are affected. As always, we are here and happy to answer any questions you may have about this or other financial or retirement concerns.