However, many people are on the fence about applying because of their state’s decision to consider the money saved from student loan forgiveness as taxable income.
North Carolina, Mississippi and Indiana have decided to tax student loan forgiveness, while states such as Minnesota, Arkansas, West Virginia and Wisconsin remain undecided on the issue.
The remaining states will not require additional state taxes.
Although it can be confusing, student loan forgiveness is still worth it for many borrowers, even if they are taxed.
Taxes are not ‘one size fits all’
According to Jacob Channel, senior economist at LendingTree, it all depends on what the government defines as income. “We all think, ‘I’m earning a salary or wages, so that’s my income.’ But other things very often fall into the income category,” Channel tells CNBC Make It. “For example, if you go to school and get a grant, that grant money could end up being counted against your income.” Additionally, Channel says these taxes will likely vary from state to state. “It’s going to depend a lot on what the individual state tax laws look like. Because there’s a lot of variability across the country. There really isn’t a one-size-fits-all answer. But in many cases, it’s probably just going to be considered an extra 10 in value income $20,000 and is taxed as such.’
The benefits outweigh the cons
Despite state tax credits, Channel still recommends borrowers apply for forgiveness. “For the most part, the benefit you’ll get from writing off $10,000 to $20,000 of student loan debt will likely outweigh the tax burden,” says Channel. “Even if you’re taxed at a higher rate because you got extra forgiveness, that could potentially lead to a lifetime of not having to worry about your student loan. You could be debt-free and potentially save money in the future or use the money for other things, like a down payment on a house.” North Carolina A&T graduate Carlos Williams, who currently has $41,000 in student loan debt, agrees. “At the end of the day, whatever lowers my pay is what I’m going to do,” Williams says. “It’s better than nothing.”
Possible refunds for pandemic payments
Updates to the student loan forgiveness program also allow for refunds for some people who continued to make payments during the student loan repayment freeze that began in March 2020. According to the Department of Education, you can automatically get a refund if you “successfully apply for and receive debt relief under the administration’s debt relief plan” and “your voluntary payments during the moratorium brought your balance below maximum amount of debt relief” you’re entitled to but you haven’t been paying off your loan in full.” Others who made voluntary payments during the hiatus, including those who paid off their loans in full during that period, may still be eligible for a refund and should get more information from their servicer. For Hanna Humphreys, a North Carolina native and Virginia Tech graduate, the refund might not be all that helpful. Humphreys, who finished her master’s degree in 2019, paid off her student loans during the Covid-19 pandemic, but remains undecided about applying for a refund. “I don’t know if I want to go through the application process, because if I get a refund and then I have to pay taxes on it, it seems invalid,” Humphreys tells CNBC Make It. Channel also says that while the process may be more tedious, borrowers who defaulted on their loans during the pandemic may want to seek a refund. “If you’re in a position where you don’t mind doing a little extra paperwork and there’s a way to get a refund, this might be a good option. But before you do, make sure your refund will still apply for forgiveness . You don’t want to get a refund and then have them say your loan will restart after a certain date.”
