DENVER (KDVR) — Borrowers are waiting for their student loans to be forgiven after President Biden said it would happen in October.
The Problem Solvers talked with a finance professor at The University of Denver to explain what this student loan forgiveness plan could mean for your taxes and inflation.
Biden’s executive order could cancel up to $10,000 in student loan debt for individual borrowers who earned less than $125,000 in either 2020 or 2021, or married couples who made less than $250,000 annually. However, if you’ve received a pell grant you can get up to $20,000 forgiven.
There are some concerns that borrowers will have to pay taxes on the amount they get forgiven. This means it might not be that big of a break, but DU finance professor Mac Clouse said that in Colorado, taxes would not apply.
“There’s no federal tax on it. The federal [government] said there will be no tax. On a state basis, it’s up to the states and it depends on whether the state confirms with the federal tax statutes,” said Clouse. “Most states do that, Colorado is one. There are three states that have already said they will tax. That’s Indiana, North Carolina, and Mississippi who said they will call that taxable income and you’ll have to pay taxes on it.”
About 8 million borrowers could be eligible to receive relief without applying.
The U.S. Department of Education said for borrowers whose income data the U.S. Department of Education doesn’t have, the administration will launch a simple application in October. Borrowers won’t need to upload any documentation or have an FSA ID to submit their applications.
So, assuming borrowers are paying income tax in Colorado, they won’t pay taxes on the amount they’re forgiven regardless of where they went to school.
With inflation already at an all-time high, there are questions about whether this student loan forgiveness plan will help or hurt inflation. Clouse believes it doesn’t move the dial either way.
“One thing that’s different about this is it’s not like the stimulus checks where the government actually sent a check out to people. So, it’s not like the government is going to say, ‘Hey, we’re going to send you $10,000 and use this to make your payments.’ It’s just the fact that you’re not going to have to make payments when they come due. So you still come out ahead, it’s just not the same,” said Clouse. “To think that people are now going to immediately spend this $10,000 on something and it’s going to add to the inflation or it’s going to enable them to reduce other debt or keep up with the higher prices of goods and services. That’s not quite the way it works.”
For those who need to apply, the application is expected to open this month. Most borrowers can expect relief within six weeks.
If you would like to be notified when the application is open, sign up for alerts on the Department of Education subscription page.
