Many people want to know if they will be expected to pay federal or state income tax on student loan debt that has been forgiven.
Up to 50% of Michigan residents with federal student debt will have their loans cut in half or forgiven entirely through student loan forgiveness announced by the Biden administration Wednesday, according to state officials.
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Borrowers who earn less than $125,000 and married couples earning less than $250,000 will have up to $10,000 in student loan debt forgiven. Pell Grant recipients can have up to $20,000 in student debt forgiven.
Will you owe federal taxes?
No. You will not owe federal taxes. That is because the American Rescue Plan made student loan forgiveness tax-free through 2025. The law covers Biden’s recently-announced forgiveness plan, too, according to a fact sheet from the White House.
Will you owe state taxes in Michigan?
No. You will not owe state taxes. Federal student loan debt forgiveness will not be treated as taxable income in Michigan.
“Nearly 700,000 Michiganders will have their debt cut in half or eliminated entirely, lifting a huge burden off their backs. People can use these savings to buy a home, start a business, get married, or start a family. I will work with anyone to keep lowering the cost of higher education and offering more paths for Michiganders to earn a higher education tuition-free, without going into debt in the first place,” Michigan Gov. Gretchen Whitmer said.
The decision is expected to benefit up to 1.4 million Michigan residents who have federal student loans. According to state officials, 30% of residents with federal loans, approximately 420,000 people, owe less than $10,000 and this would forgive all of their debt.
Around 50% of Michiganders with federal student debt, approximately 700,000 people, owe less than $20,000, and their debt would be cut in half or forgiven entirely. Nearly 700,000 more Michiganders will receive important loan relief.
In addition to the forgiveness, the pause on student loan repayment, interest and collections for all federal borrowers has been extended through Dec. 31, 2022.