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California: Biden’s Student Loan Forgiveness Will Not Be Subject To Taxes

student loan forgiveness

Four million California student loan borrowers will not have to pay taxes on their student debt relief.

On Wednesday, August 24, President Joe Biden announced that borrowers earning under $125,000 a year would receive up to $20,000 in debt relief. However, questions arose over the taxation of this relief. 

The student debt relief would not be subject to federal income taxes due to Biden’s American Rescue Plan. However, state tax codes vary, and some borrowers may be subject to state income tax on the broad relief.  

But the state leaders in California informed borrowers that they need not be concerned.

said Senator Toni Atkins and Assembly Speaker Anthony Rendon in a joint tweet

They further stated in the tweet that they’ll immediately exempt the debt relief from taxation in early 2023 if it is not tax-exempt under current California law. They further assured borrowers, “One way or another, California will not tax the federal student debt relief.”

Reports previously indicated that California was part of the seven states that would consider taxing federal student loan forgiveness. 

However, according to The Tax Foundation, the states in question–Indiana, Wisconsin, Arkansas, Minnesota, Mississippi, and North Carolina–do not have provisions in their tax codes that exclude student loan forgiveness from income. So, extra measures would have to be taken to ensure that Biden’s relief is not taxed.

There may be misunderstandings and inquiries during the implementation process. That’s because this is the first time in American history that student debt has been canceled on this magnitude. 

The Education Department has stated that it is prepared to implement this relief, stating that student loan forgiveness applications will be live in early October. Additionally, it encouraged borrowers to sign up to receive notifications of any updates on the relief. It also released a FAQ detailing eligibility and how the relief will be administered.

There is still time for states to make their positions clear on whether or not they will tax student loan forgiveness. But the states likely need to decide before borrowers begin filing their tax returns.

Related: Explore Your Student Loan Forgiveness Options In California