I really thought this was a problem for which few folks were paying attention.

Sure, there are a slew of folks complaining that President Biden plans to forgive $ 10,000 in student loans ($20,000 if these were for Pell Grants).  Not many were complaining that he also extended the moratorium on loan payments for principal, interest, and even collections through the rest of the year.  Part of the problem is that since I went to college, the Federal (and State) governments have been attenuating their support for higher education.  It’s why tuition at the University of Michigan (a state institution) for out-of-state students is about the same as what Harvard or MIT charge.  And, why UVa’s tuition has climbed from under $ 3000 to almost $ 19 for in-state students and to a notch below $ 53K for out-of state students.

We should also remind ourselves that Pell Grants are issued only to low income students.   And, it took me a long time to figure out what a Pell Grant loan is.  You see the grant is tax-free, with no require to repay it. But, it’s also limited to under $ 7000 (actually, $6895 for this school year).  But, since tuition can typically run $27330 for a public institution degree, many of these folks also need to borrow money.  So, it’s really a loan that is piggy-backed to the Pell Grant recipient.  And, these folks who get the loan typically can only afford to shell out about $ 6000 as a family contribution.

The other folks- the ones getting the $ 10K loan forgiveness- are  only those whose income is below a threshold of $125K (or $ 250K for married couples).  But, that cutoff means some 95% of the folks who got loans will get some sort of forgiveness!  (20 million will have their loans totally forgiven.)

And, under the 2021 law, The American Rescue Plan Act, student loan forgiveness was deemed to be nontaxable for federal purposes (though 2025).  That’s a big change since forgiven debt is generally taxable by the IRS.  (That is why there is a special form, the 1099C, that is used to report loan forgiveness.)

Normally, that would mean the states wouldn’t be taxing the amount of the forgiven loans.  However, since the special depreciation rules were created, many states no long are in “conformance” to federal law.  That non-conformance applies to the student loan forgiveness, too.

States like Arkansas, California, Indiana, Minnesota, North Carolina, and Wisconsin are not in conformance when it comes to this loan forgiveness.   Actually, California believes if the Department of Education forgiveness program under Section 1098e of US Code Title 20, then the loan could be forgivable under state regulations.  (If a different law section is employed, then Californians will be subject to state taxation on the loan forgiveness.)

And, if the loan is not forgivable under state law, then the bill will range from $ 300 to $ 1600 (California is, of course, the highest; the next highest state will impose an $ 1100 maximum tax), depending upon your state of residence and income level.

The only saving grace is that the IRS has directed the Department of Education (and other loan holders) to NOT issue 1099c’s to any borrowers with canceled debt.  That means the states will not be directly alerted to the forgiveness.  However, it also means that if they do find out about the forgiveness, you could be subject to taxes, penalties for not reporting it, and interest on the taxes that were not paid.

This is going to be a heck of thing, don’t you think?

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