Will Michiganders Have To Pay Taxes on Their Student Loan Forgiveness?
If you're one of the many Americans who have had to take out student loans for yourself or a loved one in order for them to chase their dreams in higher education, you're likely already aware of the announcement from the White House earlier this year. In case you missed the great news, 45 million americans will be able to reduce if not eliminate a chunk of their student debt.
Across the board, most people with federal student debt will be eligible for some forgiveness: up to $10,000 if they didn’t receive a Pell Grant and up to $20,000 if they did receive one. The aid is limited to those who make less than $125,000 per year, or married couples or heads of households earning less than $250,000.
But, with that forgiveness comes a catch: in some places, that forgiveness could be seen as taxable income that would cause borrowers to have to pay back some of the money they didn't have to pay- which could be very problematic for some low income people who are benefiting from this relief that cannot afford. Because if you're struggling to pay your student loans, you probably don't have a couple of grand sitting to the side for a tax bill.
Will Michiganders have to pay taxes on our student loan forgiveness?
It's complicated - generally, that answer would be a yes. Generally when you are given student loan forgiveness before this, you would have to pay taxes. According to Michigan.gov, "If you reapply each year and qualify for relief, you may have reduced monthly payments for up to 25 years, and any remaining balance may be forgiven. However, you may be required to pay income tax on the amount that’s forgiven."
But, this new law being passed on the federal level isn't exactly the standard practice, so Michigan legislators are working to protect those who have received relief from having to be burdened with a large tax bill.
As of now, only 5 states will have to pay federal taxes on their student loans, thanks to the American Rescue Plan. If you're not aware of this plan, when Congress passed it shortly after President Biden took office in 2021, it eliminated taxes on loan forgiveness through 2025, and unless a state has a law that undermines that, we're free and clear.
When do I have to pay my remaining student loan balance?
However, don't let that forgiveness catch you off guard for when it comes time to pay back the rest of those loans, interest starts back in January 2023 for student loans, so any payments made between now and then would be beneficial towards your loan being paid down more quickly.