Hi, I’m Bette Hochberger, CPA, CGMA. And today, we’re going to talk a little bit about Student loan Forgiveness, aka the cancellation of college debt. This is very explicitly related to President Biden talking about forgiving student loan debt.
But canceling debt is not a new concept. You might have heard about it a little bit with COVID during the PPP, paycheck protection program loans, which were forgivable loans, but if you’ve ever had to settle credit card debt or had a foreclosure even, you might have had cancellation of debt income before. So what that means is if you have a loan and you and the person who gave you the loan or extended credit, if they’ve agreed, “We’re not going to collect from you anymore, this is what we call a cancellation of debt. And usually, it’s a taxable income event. So if you have debt canceled, that is $10,000, you’ll get a cancellation of debt income 1099 for that $10,000.
So when President Biden announced that there would be all this student loan forgiveness, my first thought as a CPA was, “Is it going to be taxable?” Oh my God, that could be a lot of money. Now, if you have a lot of student loan debt, if you have 50,000, 70,000, 80,000, or 100,000 dollars of student loan debt, and it was to be taxed as cancellation of debt income, that would mean you would get 1099 for possibly 50, 70, 100,000 dollars of income.
However, the Biden administration did say that from the 2021 to 2025 period, any of these federal loans that are forgiven will not be taxable. But there could be bad news. So if you live in an income tax state, which isn’t Florida, you could have to pay state income taxes on the forgiveness. Now, certain states go along with what the federal government does. We call it conforming. They conform to the federal government. But not all of them do, and some have come out and said, “Listen, we’re going to do what the federal government does. We’re not going to tax you.” But some of them it’s still up in the air.
So if you live in an income-tax state and qualify for this student loan debt, you will have to talk to a tax person to ensure which boat you are in. Are you the tax-free loan forgiveness, or will you be paying state taxes on that student debt cancellation? So that’s what I have for you today.
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