Biden’s student loan decree: You can opt out if you want

Legal challenges are mounting against President Biden’s student loan forgiveness plan, which offers up to $10,000 in student loan debt forgiveness for eligible borrowers and up to $20,000 in student loan forgiveness for Pell Grant recipients. The first lawsuit for student loan debt relief was recently filed by the Pacific Legal Foundation, a libertarian group in California.

This organization argues that student loan borrowers in states that could or will tax forgiven student loan debt would be worse off than other borrowers because of Biden’s student loan forgiveness. However, the Justice Department says that forgiving federal student loans does not create an “automatic” tax penalty because borrowers are not required to forgive their student loans.

Why is that important? Well, the Pacific Legal Foundation’s challenge raises important questions regarding states that will or could (you could live in one of them) tax forgiveness on student loan debt and whether you must accept student loan debt forgiveness.

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Did you know you can opt out of student loan forgiveness?

The lead plaintiff in the student loan forgiveness case is attorney for the Pacific Legal Foundation, Frank Garrison. Garrison argued that an Indiana state tax on forgiven student loan debt would constitute an immediate tax liability and an unfair penalty. As an Indiana taxpayer, he asked the court to invalidate President Biden’s student loan debt relief program and pointed to at least six other states where borrowers could be similarly harmed, Garrison said.

The federal government responded to the lawsuit by saying borrowers eligible for so-called “automatic” debt forgiveness can opt out of Biden’s student loan forgiveness plan and avoid paying state taxes on the forgiven debt. In other words, you can keep your student loan debt — if you want.

As a result of the opt-out, a federal judge recently denied the Pacific Legal Foundation’s request to block Writ on President Biden’s student loan, but gave the organization time to amend its claim.

But going forward, it might be difficult for a borrower to claim that government taxes were collected unfairly or automatically only because of Biden’s student loan breaks. The student loan forgiveness opt-out essentially allows the federal government to say that the borrower chooses whether they have forgiven the student loan debt in the first place. That would make any tax “penalty” a matter for the state.

Another challenge in this case is that lead plaintiff Garrison has yet to pay any state tax on forgiven student loan debt. So it was unclear whether there was sufficient legal damage to justify shutting down President Biden’s student loan forgiveness program. However, this could potentially change once student loans are forgiven and some states impose a tax liability on the forgiven debt.

Will your state tax forgive student loan debt?

You may be wondering why anyone would want to reject debt relief for $10,000-$20,000 in student loans. There could be many reasons, but this particular legal case highlights the idea that borrowers in states that tax or will tax student loan forgiveness may not want to pay additional state taxes.

Whether some states will tax foregone student loans is an evolving situation at this time. However, some states have confirmed that they will tax lapsed student loan debt (e.g., Indiana, Mississippi, and North Carolina). In Indiana (where the lead plaintiff in the Pacific Legal Foundation case reportedly resides), the potential tax on $10,000 of forgiven student loan debt could be as high as $1,000.

For example, if you live in Mississippi, the maximum amount of state tax liability is $500. However, these calculations assume that you are eligible for the full $10,000 of loan forgiveness for those earning less than $125,000 per year. And if you are a Pell Grant recipient in a state that could or will tax forgiveness of student loan debt and are eligible for up to $20,000 in student loan relief President Biden’s planyour state tax liability could be higher.

There are other states that could or will tax extinguished student loan debt. As of now, however, most states plan to match the federal government’s stance that most forgiven student loan debt will not be taxable by 2025.

How to Apply for Student Loan Waiver 2022

On your website, the Department of Education says if borrowers want to opt out of student loan debt relief for any reason, they will be given the opportunity to do so. However, it’s unclear at this point exactly how denial of student loan debt relief will work.

In addition, the Biden administration has said most borrowers must apply for student loan forgiveness. This is important because it means that an application is a positive step that the borrower must take in the process. (That could also make it harder for borrowers to succeed with legal claims that the federal government forced them to receive student loan debt relief.)

All this means that if you don’t want to Student Loan Debt Relief, you should look for more specific information from the Department of Education on how to opt out. Or contact your credit service provider for advice.

Information on how to apply for 2022 student loan forgiveness, including applications and instructions for student debt forgiveness – and likely further guidance on how to opt out – is expected soon from the Department of Education.

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