The Biden administration’s student loan forgiveness plan has lifted a weight off the shoulders of many Americans, with some borrowers eligible for forgiveness of up to $20,000 in federal student loans.
However, many people are reluctant to apply due to their state’s decision to consider money saved from student loan forgiveness as taxable income.
North Carolina, Mississippi and Indiana have all moved to tax student loan forgiveness, while states like Minnesota, Arkansas, West Virginia and Wisconsin remain undecided on the issue.
The rest of the states will not charge additional state taxes.
Although it may be confusing, student loan forgiveness is still worth it for many borrowers, even if they are taxed.
According to Jacob Channel, senior economist at LendingTree, it all comes down to what the government defines as income.
“We all think, ‘I earn a salary or a salary, so this is my income.’ But other things very often fall into the income category,” Channel told CNBC Make It. “For example, if you’re in school and you get a scholarship, the money from that scholarship might end up counting as your income.”
Additionally, Channel says these taxes will likely be different from state to state.
“A lot will depend on what each state’s tax laws look like. Because there’s a lot of variability across the country. There’s really no one answer. But in many cases it won’t be. probably only considered another 10 to $20,000 of income and taxed as such.”
Despite state tax levies, Channel still recommends that borrowers apply for a forgiveness.
“In most cases, the benefit you’ll get from forgiving $10,000 to $20,000 of your student loan debt will likely outweigh the tax burden,” Channel said.
“Even if you’re taxed at a higher rate because you got an extra discount, it could potentially pay you a lifetime without having to worry about your student loan. You could be debt-free and potentially save money. money in the future or use the money for other things, like a down payment on a house.”
North Carolina A&T graduate Carlos Williams, who currently has $41,000 in student loan debt, agrees.
“At the end of the day, I’ll do anything that lowers my payout,” Williams says. “It’s better than nothing.”
Updates to the Student Loan Forgiveness Plan also allow refunds for some people who continued to pay during the student loan repayment pause that began in March 2020.
According to Department of Educationyou can automatically receive a refund if you “successfully apply for and receive debt relief under the Administration’s Debt Relief Plan” and “your voluntary payments during the payment pause have brought your balance below the maximum amount of debt relief you are eligible for, but did not repay your loan in full.”
Others who made voluntary payments during the break, including those who fully repaid their loans during this time, may still be eligible to receive a refund and should get more information from their service agent.
For Hanna Humphreys, a North Carolina native and Virginia Tech graduate, a refund may not be very helpful. Humphreys, who completed graduate school in 2019, paid off her student loans during the Covid-19 pandemic but remains undecided about whether to request repayment.
“I don’t know if I feel like going through the application process, because if I get a refund and then have to pay taxes on it, that kind of seems null and void,” Humphreys told CNBC. Make It.
Channel also says that while the process may be more cumbersome, borrowers who have paid off their loans during the pandemic may want to consider getting a refund.
“If you’re in a position where you maybe don’t mind doing a little extra paperwork, and there’s a way for you to get reimbursed, this might be a good option. But before you do , make sure that any money refunded to you will always ask for a refund.You don’t want to get a refund, then ask them to say your loan starts again after a certain date.