Why Forgiven Student Loan Debt Should Probably Be Taxed as Income
President Joe Biden’s recently unveiled student debt forgiveness proposal might just have an unintended consequence for residents of six states: an increased tax bill. While most states plan to follow the federal government’s lead and not treat one-time student loan forgiveness as taxable income, six states have no such plans. While Arkansas, Minnesota, West Virginia, and Wisconsin might decide to exempt federal student loan forgiveness from taxation, two states—Mississippi and North Carolina—have formal plans to tax loan forgiveness.
The results of this taxation could be an unexpected financial hit to many receiving loan forgiveness. According to Inc., depending on the state and the amount forgiven, individuals may see their taxes rise by $500 to $985.
However, according to Neal McCluskey, the director of the Center for Educational Freedom at the CATO Institute, low-income borrowers still stand to benefit in the long term from debt forgiveness.
“Typically, the people who are struggling the most with this debt actually have low debt, often below $10,000,” McCluskey tells Reason. “So I think they’ll be much better off for that debt having been forgiven even if it leads to some minor increase in their state taxes.”
McCluskey argues that the largest tax increases are likely to affect those Americans with larger student loan balances—a group that is disproportionately middle and upper-middle class. According to an Education Data Initiati
Article from Reason.com