Biden s Student Loan Forgiveness You Can Opt Out if You Want To Kiplinger Kiplinger is supported by its audience. When you purchase through links on our site, we may earn an affiliate commission. Here's why you can trust us.

Biden s Student Loan Forgiveness You Can Opt Out if You Want To

Following a student loan debt relief lawsuit, the Department of Education says that borrowers can opt out of President Biden's student loan forgiveness plan. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Kelley R. Taylor last updated 25 October 2022 Legal challenges are mounting against President Biden's student loan forgiveness plan to offer up to $10,000 of student loan debt relief for eligible borrowers, and up to $20,000 in student loan forgiveness for Pell Grant recipients. The first student loan debt relief lawsuit was recently filed by the Pacific Legal Foundation, a libertarian group in California. That organization argues that student loan borrowers in states that could or will tax forgiven student loan debt would be worse off than other borrowers, because of Biden's student loan forgiveness. However, the Department of Justice says that federal student loan forgiveness doesn't create an "automatic" tax penalty because borrowers aren't required to have their student loans forgiven. Why does this matter? Well, the Pacific Legal Foundation's challenge raises important questions concerning states that will or might tax forgiven student loan debt (you might live in one of them), and whether you have to accept student loan debt forgiveness.

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Did You Know You Can Decline Student Loan Forgiveness

The lead plaintiff in the student loan debt relief case is a Pacific Legal Foundation attorney, Frank Garrison. Garrison argued that an Indiana state tax on forgiven student loan debt would amount to immediate tax liability and an unfair penalty. As an Indiana taxpayer, he asked the court to invalidate President Biden's student loan debt cancellation program and pointed to at least six other states where, Garrison said, borrowers could be similarly harmed.

Biden's Student Loan Forgiveness: What it Means for You The federal government responded to the lawsuit by saying that 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 cancelled debt. In other words, you can keep you student loan debt-if you want to. As a result of the opt-out, a federal judge recently denied Pacific Legal Foundation's motion to block President Biden's student loan forgiveness and dismissed the organization's claim. But this case means that going forward, it could be difficult for a borrower to claim that state tax has been unfairly or automatically imposed merely because of Biden's student loan relief. The student loan forgiveness opt out basically allows the federal government to say that the borrower chooses whether to have forgiven student loan debt in the first place. That would make any tax "penalty" a state issue. Another challenge with this case is that the lead plaintiff, Garrison, hasn't yet paid any state tax on forgiven student loan debt. So, it was unclear whether there's sufficient legal harm to justify stopping President Biden's student loan forgiveness program. However, that could potentially change once student loans are forgiven and some states impose tax liability on the cancelled debt.

Will Your State Tax Forgiven Student Loan Debt

You may be wondering why someone would want to decline $10,000 to $20,000 of student loan debt forgiveness. There could be many reasons, but this particular legal case points to the idea that borrowers in states that will or could tax student loan forgiveness might not want to pay additional state taxes.

Some States Will Tax Student Loan Forgiveness Right now, whether some states will tax forgiven student loans is an evolving situation. But a few states have confirmed that they will tax cancelled student loan debt (e.g., Indiana, Mississippi, and North Carolina). In Indiana (where the lead plaintiff in the Pacific Legal Foundation case reportedly resides), the potential tax on $10,000 of forgiven student loan debt could be as high as $1,000. If you live in Mississippi, as another example, the maximum amount of state tax liability would be $500. However, these calculations assume that you are eligible for the full $10,000 of loan forgiveness for individuals with income under $125,000 a year. And if you are a Pell Grant recipient in a state that could or will tax forgiven student loan debt, and are eligible for up to $20,000 in student loan relief under President Biden's plan, your state tax liability could be higher. There are other states that could or will tax cancelled student loan debt. However, as of now, most states plan to conform to the Federal government's stance that most forgiven student loan debt is not taxable through 2025.

How to Apply for 2022 Student Loan Forgiveness

On its website, the Department of Education says, if borrowers would like to opt out of student loan debt relief for any reason, they will be given an opportunity to do so. However, it's unclear at this point, exactly how opting out of student loan debt relief will work.

Student Loan Refunds are Real, But You Might Not Be Eligible Additionally, the Biden administration has said that most borrowers will have to apply to receive student loan forgiveness. This is important because it means that an application is an affirmative step that the borrower must take in the process. (That could also make it harder for borrowers to succeed with legal claims alleging that the federal government forced them to receive student loan debt forgiveness.) All 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 opt out. Or you can contact your loan servicer for guidance. Information on how to apply for the 2022 student loan forgiveness, including applications and instructions for student debt relief-and likely more guidance on opting out-are expected soon from the Department of Education.

Student Loans and Taxes: Some Basics to Know Explore More Tax Tips Kelley R. TaylorTax Editor, Kiplinger.comWith more than 20 years experience as an in-house legal counsel and business journalist, Kelley R. Taylor has contributed to numerous national print and digital magazines on key issues spanning education, law, health, finance, and tax. Kelley particularly enjoys translating complex information in ways that help empower people in their daily lives and work. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like $2.04 Billion Powerball Lottery Jackpot Winner Will Have a Massive Tax Bill The $2.04 billion-dollar Powerball jackpot has its big winner and the federal government will get a big chunk of the prize from taxes. By Kelley R. Taylor • Last updated 9 November 22 New "Stimulus" Check 2022: Massachusetts Tax Refund Money is Being Sent Now Massachusetts will return nearly $3 billion to eligible taxpayers beginning in November. By Kelley R. Taylor • Last updated 9 November 22 What's the Standard Deduction for 2022 vs. 2023? Tax Breaks Most Americans claim the standard deduction on their federal tax return instead of itemized deductions. How much can you claim on your 2022 and 2023 returns? By Rocky Mengle • Last updated 9 November 22 What Are the Capital Gains Tax Rates for 2022 vs. 2023? capital gains tax The capital gains tax rate that applies to a capital gain depends on the type of asset, your taxable income, and how long you held the property sold. By Rocky Mengle • Published 3 November 22 Virginia 2022 "Stimulus" Tax Rebates Many eligible Virginians have received an up to $500 tax rebate check for 2022. By Kelley R. Taylor • Last updated 2 November 22 What Are the Income Tax Brackets for 2022 vs. 2023? tax brackets Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate. By Rocky Mengle • Last updated 9 November 22 California Stimulus Checks: More Debit Cards Going Out This Week If your last name begins with F to M, a California stimulus payment debit card could be in your mailbox soon. By Rocky Mengle • Last updated 7 November 22 529 Plan Contribution Deadlines Coming Soon in Many States Year-end state deadlines for making 529 college savings plan contributions that can maximize state tax breaks, are coming soon. By Kelley R. Taylor • Last updated 28 October 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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