Cancellation of student loan debt could come with state income tax
DULUTH, MN. (KBJR) — While student borrowers in Minnesota and Wisconsin may soon see some of their federal debt forgiven, they may still have to pay taxes on it.
By the end of 2022, student borrowers can expect $10,000 to $20,000 of their federal student loan debt to be forgiven after the Biden administration announced the move in August.
“The response I’ve heard so far has been positive, especially from students and recent alumni who have student debt,” said Donna Dahlvang, director of financial aid and education. scholarships at UMD.
However, this forgiveness could cost some people hundreds of dollars.
“The amount that is forgiven is not federally taxable,” Donna Dahlvang. “It is currently taxable in several states in the United States, and Minnesota and Wisconsin are two of them.”
The state tax codes of Minnesota and Wisconsin currently do not conform to the federal code, which means student loan forgiveness would be taxed as state income.
“At this point it’s taxable, until they say it’s not taxable,” accountant Jim Hacking said.
Hacking said if the law doesn’t change before the 2023 tax season, borrowers could be taxed hundreds of dollars.
“So if it’s taxable I would say a good average number would be six percent, you know if you have $10,000 forgiven you could end up owing $600 in state income taxes” , said Hacking.
He said if the law changes, for those who have a balance remaining after forgiveness, consolidating loans into one payment is the best repayment option.
“Pulling things together into one fixed payment at a lower rate really simplifies things for people coming out of school with student loan debt,” Hacking said.
The loan forgiveness would not be taxable in Minnesota and Wisconsin if each state legislature passes new tax code legislation in the next regular or special session.
Arkansas, Mississippi, and North Carolina also have laws in place that make canceled loans taxable.
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