Those who benefit from President Joe Biden’s policy to cancel $10,000 in student debt per borrower will not have to pay taxes on their forgiven loans thanks to a provision passed under the American Rescue Plan last year.
The loan cancellation policy applies to individuals with annual wages under $125,000. Although current law generally considers forgiven debt to be taxable income, student loans were exempted from such income-driven repayment plans through 2025 under “the rationale that tax burden arising from treating forgiven student debt as income partially undermines debt relief,” according to an analysis from the Tax Foundation.
“It makes sense to have consistent rules in the tax code,” Tax Foundation federal policy analyst Alex Muresianu told The Daily Wire. “It doesn’t make sense to make forgiven student loan debt exempt from taxation while other forms of debt forgiveness typically count as taxable income.”
The treatment of student loan cancellation with respect to taxes differs from state to state, according to another report from the Tax Foundation. While many states are following federal guidelines enacted under the American Rescue Plan, others — including Arkansas, California, Minnesota, and North Carolina — are prepared to tax canceled student debt.
The Biden administration’s loan cancellation plan has received criticism from both sides of the aisle due to its regressive nature. According to nonpartisan analysis from the University of Pennsylvania’s Wharton School, as much as 42% of the benefit from the policy would impact Americans earning more than $82,400 per year.
The Wharton analysts also implied that the loan cancellation will prompt students to “eventually reorganize their financing toward additional borrowing.” Although the policy could increase access for students who would not otherwise be able to afford higher-level degrees, universities themselves could capture the value “in the form of higher prices” as they raise tuition.
Indeed, Muresianu confirmed to The Daily Wire that student loan cancellation could distort market expectations as potential borrowers begin weighing the possibility of additional one-time cancellations in the future. “On paper, this wouldn’t change incentives to take on more debt, because the forgiveness is retroactive,” he remarked. “But in practice, student loan forgiveness suggests the federal government might forgive future student loan debt, which would incentivize greater borrowing.”
Nixing $10,000 of student loans per borrower would cost $298 billion in 2022 and a total of $329 billion by 2031, presuming that the policy is renewed each year, according to the nonpartisan Wharton analysis. A recent survey from CNBC shows that 59% of Americans are concerned that student debt cancellation “will make inflation worse.”
While the plan was still deliberated by White House officials, former Treasury Secretary and National Economic Council Director Lawrence Summers broke from his party to warn that student debt cancellation would worsen soaring college costs. Average private university tuition is currently $43,775, while average in-state public university tuition is $11,631, according to data from U.S. News and World Report.
“Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college,” Summers explained. “Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”