Bill would waive taxes on student loan forgiveness

Updated: Jun. 1, 2021 at 5:51 PM EDT
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LANSING, Mich. (WILX) - If you have student loan debt, you’re probably aware of how loan forgiveness affects your taxes. Right now, forgiven loans are considered as income on tax day. But a new bill in the Michigan House of Representatives is looking to change that.

The bill would make loans forgiven by the department of education exempt from being counted towards your state income tax total. Total student loan debt across the U.S. is around 1.7 trillion dollars. Democratic lawmakers in the Michigan House want to ensure that students who get their federal loans forgiven, don’t have to pay state income tax.

Padma Kuppa is a State Representative from 41st House District.

Kuppa said, “I see how much college costs and how prohibitive that is for people who really want to work hard to get a college degree, but sometimes they don’t have the financial means.”

Forgiven loans are considered income for tax purposes. So, whatever is forgiven, gets added to your tax responsibilities. This bill would prevent that.

Megan Coval is VP of Policy and Federal Relations for the National Association of Student Financial Aid Administrators.

“We at the national level have advocated for loan forgiveness to be tax free,” Coval said. “It is definitely a great benefit to the student to have their loans forgiven, but then if they turn around and are kind of hit with a big tax bill because of it … that’s really kind of hurting them in a way.”

People in some forgiveness programs have to wait years to take advantage of them based on making consistent payments over time. Sarah Brenner is a lawyer in the Lansing area.

“If this passes, it would benefit me,” Brenner said. “It’s still not going to benefit my husband because he still has his portion that he has to pay off. It would be fabulous to not have to then pay taxes on top of the money.”

The Biden administration is pushing to forgive federal student loans altogether. If that happens, students may be asked to pay income tax on tens of thousands of dollars of forgiven debt. If this bill passed, the taxes could be dismissed.

Kuppa said, “If you’re getting the benefit, you shouldn’t have to pay tax on it as income because eventually you’ll be paying tax once you get a better job. So, it’ll be a way to alleviate the burden.”

Right now, this bill only has Democratic support. Lawmakers hope it can become bipartisan to help push it forward.

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