PAI: Student loan relief also comes with tax relief

by Jack Hoffman, Public Assets Institute Vermonters who qualify for a reduction in their student loan debt will get another break from the state: The loan forgiveness won’t be taxed.

Debt forgiveness is typically counted as income and taxed by both federal and state governments. People who negotiate debt reduction with credit card companies are sometimes surprised to learn they owe income taxes on the amount written off.

Before President Joe Biden announced his student loan forgiveness plan, the American Rescue Plan Act (ARPA), passed in 2021, anticipated the tax consequences of such a proposal. Under ARPA, federal student loan debt forgiven through 2025 is not be counted as federal taxable income.

Because Vermont uses federal taxable income as the starting point for determining state personal income taxes, student loan write-offs won’t be taxed at the state level either for the next few years. Some states are choosing to tax the new debt relief. The Vermont Legislature could, too, by changing existing law, but that seems unlikely.

Biden authorized cancellation of up to $20,000 in federal student loan debt for recipients of federal Pell Grants with loans held by the U.S. Department of Education. Pell Grants are awarded to undergraduates with “exceptional financial need.” Non-Pell Grant recipients are eligible to have up to $10,000 of their student debt forgiven. Individuals with income of $125,000 or more—$250,000 or more for couples—are not eligible for the student loan forgiveness program.

According to an announcement by the Vermont Student Assistance Corp., about 77,000 Vermonters have federal student loans. Of those, about 30 percent are Pell Grant recipients and therefore eligible for the greater loan cancellation amount.

Public Assets Institute, Montpelier, September 27