California Lawmakers: State Won’t Tax Canceled Student Loans

Experts say that under current California law, student loan debt canceled under President Joe Biden’s plan won’t be tax exempt.

Published September 14, 2022

Edited by Alex Pasquariello
California Lawmakers: State Won’t Tax Canceled Student Loans
Photo by Dusty Pixel photography / Moment Open / Getty Images

  • Biden late last month announced his plan to cancel up to $10,000 in federal student loan debt and up to $20,000 for Pell Grant borrowers.
  • Relief won’t be taxed at the federal level, but analyses of California tax law indicate that canceled student loan debt isn’t tax exempt.
  • Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin may also tax discharged student loans.

California lawmakers vowed on social media that the state would not tax federal student loans forgiven under President Joe Biden’s sweeping debt-relief plan.

Biden late last month announced his plan to cancel up to $10,000 in federal student loan debt for qualified borrowers and up to $20,000 for Pell Grant borrowers. That forgiven debt will not be subject to federal income taxes pursuant to the American Rescue Plan (ARP).

As part of the ARP, Congress enacted Section 108(f)(5) of the Internal Revenue Code (IRC) to expand the types of student loans that would not be subject to taxation. However, not every state follows the federal treatment of the IRC, and a handful of states may tax as income student debt forgiven under Biden’s plan.

At present, California is one of them, according to an analysis by Jared Walczak of the nonprofit Tax Foundation. In subsequent reporting by The Los Angeles Times, experts agreed that Biden’s blanket forgiveness didn’t meet the requirements to be tax exempt under California tax law.

In response to the L.A. Times story, California Assembly Speaker Anthony Rendon and Senate President pro Tempore Toni G. Atkins took to Twitter to pledge that the state would not tax student debt forgiven under Biden’s plan.

“Once the federal government finalizes details of the student debt relief program, we will know whether the relief is tax exempt under current California law,” they said in a joint statement posted on Twitter. “If not, we will make the relief tax exempt through immediate action in early 2023. Rest assured, one way or another, California will not tax the federal student debt relief.”

In his analysis, the Tax Foundation’s Walczak observed that California law and public opinion don’t align.

“California [is] a state where statutes seemed to indicate taxability but where the state consensus ran in the other direction,” he wrote.

Officials in Indiana, Mississippi, and North Carolina have confirmed they plan to tax borrowers who receive loan forgiveness. Walczak wrote that tax laws in Arkansas, Minnesota, and Wisconsin would also impose state taxes on canceled federal loans.

For now, borrowers in the nation’s most populous state will have to wait for the Department of Education to release more details and trust lawmakers’ Twitter promises.

“Rest assured, one way or another, California will not tax the federal student debt relief,” Atkins tweeted.