Biden’s student loan forgiveness: You can opt out if you want
Legal challenges mount against President Biden’s student loan forgiveness plan to provide up to $10,000 in student loan debt relief to eligible borrowers and up to $20,000 in loan forgiveness student to Pell Scholarship recipients. The first lawsuit for student debt relief was recently filed by the Pacific Legal Foundation, a California libertarian group.
This organization argues that student borrowers in states that could or will impose canceled student loan debt would be worse off than other borrowers, due to Biden’s student loan cancellation. However, the Justice Department says federal student loan forgiveness does not create an “automatic” tax penalty because borrowers are not required to have their student loans forgiven.
Why is this important? Well, the challenge from the Pacific Legal Foundation raises some important questions about which states will or could impose student loan debt forgiveness (you could live in one of them), and whether you have to accept the forgiveness. of student loan debt.
Did you know you can decline student loan forgiveness?
The lead plaintiff in the student debt relief case is Pacific Legal Foundation attorney Frank Garrison. Garrison argued that an Indiana state tax on canceled student loan debt would amount to an immediate tax liability and an unfair penalty. As an Indiana taxpayer, he asked the court to strike down President Biden’s student loan debt forgiveness program and pointed to at least six other states where, Garrison said, borrowers could suffer similar harm.
The feds responded to the lawsuit by saying borrowers, who are eligible for so-called “automatic” debt relief, can opt out of Biden’s student loan forgiveness plan and avoid paying state taxes on the debt. canceled debt. In other words, you can keep your student loan debt if you want.
Following the opt-out, a federal judge recently denied the Pacific Legal Foundation’s motion to block the cancellation of President Biden’s student loan, but gave the organization time to amend its request.
But in the future, it may be difficult for a borrower to claim that state tax was unfairly or automatically imposed. only because of Biden’s student loan relief. The student loan forgiveness opt-out essentially allows the federal government to say that the borrower chooses whether or not to have their student loan debt forgiven in the first place. This would make any tax “penalty” a matter of state.
Another challenge in this case is that the lead plaintiff, Garrison, has yet to pay state taxes on the canceled student loan debt. So it was unclear whether there was enough legal damage to justify stopping President Biden’s student loan forgiveness program. However, that could potentially change once student loans are canceled and some states impose a tax liability on canceled debt.
Is your student loan debt tax forgiven by the state?
You might be wondering why anyone would want to turn down $10,000 to $20,000 in student loan debt forgiveness. There could be many reasons, but this particular legal case underscores the idea that borrowers in states that will or could tax student loan forgiveness might not want to pay additional taxes.
Currently, the question of whether certain states will impose exempt student loans is an evolving situation. But a few states have confirmed they will tax canceled student loan debt (eg, Indiana, Mississippi, and North Carolina). In Indiana (where the lead plaintiff in the Pacific Legal Foundation case is believed to reside), the potential tax on $10,000 of canceled student loan debt could reach $1,000.
If you live in Mississippi, as another example, the maximum state tax liability would be $500. However, these calculations assume that you qualify for the full $10,000 loan forgiveness for people with incomes below $125,000 per year. And if you are a Pell Grant recipient in a state that could or will impose canceled student loan debt and you are eligible for up to $20,000 in student loan relief under President Biden’s Planyour state tax liability may be higher.
There are other states that could or will tax canceled student loan debt. However, as of now, most states plan to comply with the federal government’s position that most canceled student loan debt is not taxable until 2025.
How to Apply for Student Loan Forgiveness 2022
On his website, says the Department of Education, if borrowers wish to opt out of student debt relief for any reason, they will be given the opportunity to do so. However, it is unclear at this point exactly how the withdrawal of student debt relief will work.
Additionally, the Biden administration has said most borrowers will need to apply for student loan forgiveness. This is important because it means that an application is a positive step for the borrower to take in the process. (It could also make it harder for borrowers to succeed with legal claims alleging the federal government forced them to receive student loan debt forgiveness.)
All of this means that if you don’t want student loan debt relief, you should keep an eye out for more specific information from the Department of Education on how to unsubscribe. Or you can contact your loan manager for advice.
Information on how to apply for the 2022 student loan forgiveness, including student debt relief applications and instructions — and likely more opt-out guidance — is expected soon from the Department of Education. ‘Education.