North Carolina and Mississippi said they will likely apply state tax to student loan forgiveness for their state residents. A handful of other states are also looking into doing the same. But Ohio isn't one of them.
The Ohio Department of Taxation’s Gary Gudmundson said Ohioans who receive federal student loan forgiveness won’t have to worry about paying state taxes on it, at least for now. He said "under current Ohio law, this sort of student loan forgiveness is not taxable."
In recent days, Democratic President Joe Biden announced a plan to allow federal student loan borrowers to receive up to $10,000 in loan forgiveness as long as they don’t earn more than $125,000 a year. Borrowers who had Pell Grants while attending college could have up to $20,000 worth of their loans forgiven. The Biden administration's student loan forgiveness plan is exempt from federal tax.
But how states apply the taxability of this student loan forgiveness has to do with the way they deal with the federal American Rescue Plan Act (ARPA).
The Tax Foundation, an independent non-profit tax policy organization, said as a general rule, a discharge of indebtedness counts as income and is taxable. But because of ARPA, that's not necessarily the case with this student loan forgiveness plan.
The organization recently issued astatementsaying, "Under § 9675 of the American Rescue Plan Act (ARPA), however, the forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income. States which follow the federal treatment here will likewise exclude debt forgiveness from their own state income tax bases. But, for a variety of reasons, not every state does that. There are at least six relevant interactions with the Internal Revenue Code (IRC) for purposes of the treatment of student loan debt cancellation."
There are some questions about whether Biden's loan forgiveness plan will actually happen. The loan forgiveness plan has sparked controversy. Some Republicans who oppose the plan in other states are threatening to file federal lawsuits to block it.
Logan Kolas, a research fellow at The Buckeye Institute, said the student loan forgiveness plan is "an absolutely awful idea."
"I think we need to realize only 16% of Ohioans have student loan debt so really what you are doing is helping recent college graduates at the expense of everybody else," Kolas said.
Kolas said forgiving the debt encourages people to take on more student debt and gives colleges more incentive to raise tuition.
But Piet van Lier, senior researcher with Policy Matters Ohio, said Ohio ranks as second overall nationally in the percentage of residents who owe student loans. He said a study his organization released in February 2020 shows minority students are more likely to have student loan debt and the problems that go along with it.
"Black and brown people who have gone into debt to cover education costs end up owing more. Often their debt increases even as they are paying it down and the racial wealth gap, it exacerbates that so this kind of debt relief will have a really big impact, particularly for lower-income and Black and brown communities," van Lier said.
The U.S. Department of Education reports the average student loan balance in Ohio is $34,923. It also said there are 1,776,400 federal student loan borrowers in Ohio who altogether owe $62.6 billion.
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