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September 14, 2022

Bad Tax News for Those With ‘Forgiven’ Student Loans

As it turns out, that $20,000 will be taxable income in several states.

In a naked and blatant ploy to drive voter turnout for young college graduates, who tend to vote Democrat (when they actually show up, that is), the Biden administration announced last month that up to $20,000 of their student loan debt would be forgiven — assuming, of course, the giveaway survives any legal challenges. Great news for the “skulls full of mush,” right?

Unfortunately for those who have complained that the repayment of what they willingly accepted was too hard and that they needed a break — never mind they’ve had one for over two years thanks to extended deferment in a long-running reaction to the COVID pandemic — the lesson they’ll learn is that what the government gives, the government can take back. (And right now the government is on the hook for between $700 billion and $900 billion for the deferment in place through the end of the year.)

Normally, as Zachary Halaschak of the Washington Examiner explains, debt forgiveness is treated as income. “Debt canceled by Biden’s executive action won’t be taxable federally,” he writes, “thanks to a provision slipped into the American Rescue Plan Act by Democrats.” The amendment, from Senators Elizabeth Warren and Bob Menendez, makes benefits from student loan forgiveness tax free until 2026, at the cost to the federal till of up to $34 billion, according to the Tax Policy Center.

But this provision doesn’t apply to those in an ever-changing handful of states whose forgiveness can be treated as taxable income on a state level because they haven’t conformed with or adapted to the current Internal Revenue Code. In such cases, those who celebrate the extra 20 grand they don’t have to pay on their student loans won’t be as happy when they owe their state hundreds of dollars in extra taxes for it — not just for the thousands of dollars that are credited without tax being withheld, but for the push into a higher tax bracket.

Besides the obvious issue with certain college students getting a break that didn’t accrue to the millions of college students and graduates who managed to pay off their debts — even if it took 15 years and a couple refinances to do so, as it did in this writer’s case — or those who chose a career path that didn’t involve college at all, there’s also a huge immediate cost to the federal government.

“CBO released its monthly budget review for August on Friday, and it confirms our explanation for why the deficit has so far fallen some $1.77 trillion to $944 billion this fiscal year,” reports The Wall Street Journal. “Some major pandemic spending programs have ended as planned, and taxpayers have chipped in $822 billion through August in additional revenue. Individual income taxes alone are up 32% in the year, to $2.41 trillion.”

But, the Journal notes: “President Biden’s loan write-offs ‘add significant uncertainty because they may lead to the recording of substantial outlays in September,’ CBO adds. ‘If significant numbers of student loans are modified in September, the 2022 deficit could be considerably larger than CBO has estimated.’”

We suppose that if you believe in the tooth fairy or that government can wave its magic wand to make you debt-free, you’ll believe the government when it says student loan forgiveness will cost nothing. Those of us who graduated from the school of hard knocks know better.

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