(NEXSTAR) — Millions of Americans will soon be able to have part or all of their federal student loans forgiven. Though the Biden administration has confirmed any relief you receive won’t be treated as taxable income for federal income tax purposes, that isn’t necessarily the case in your state.
It is even more complicated in California.
Generally speaking, any debt forgiven is considered gross income, the California Franchise Tax Board tells Nexstar.
There are exceptions. Under the California Revenue and Taxation Code, some instances of student loan forgiveness are excluded.
When it comes to President Biden’s plan to forgive up to $20,000 per borrower meeting specific criteria, the FTB says it isn’t clear yet whether Californians will be taxed for loan relief.
It will depend on how the Department of Education will administer the program. If they do so under Section 1098e of Title 20 of the United States Code, which covers loan forgiveness through an income-driven repayment plan, it could mean tax-free relief for Californians.
California’s RTC section 17132.11 says that if your student loans are repaid or canceled by the Education Department through an income-driven repayment plan, your forgiveness amount would not count as gross income and would not be taxed.
California is still waiting for the Education Department to confirm how it plans to administer the loan forgiveness in order to determine if it meets the criteria to be tax-free. Department officials did not immediately return Nexstar’s request for additional information.
California has the most federal student loan debt of any state; its residents owe a cumulative $141.8 billion in federal student loan debt as of December 2021, a recent report from the Education Data Initiative found. Among the 3.8 million student loan borrowers living in California, the average debt is slightly more than $37,000.
If you are eligible for student loan forgiveness, you will likely have to fill out a form in October to receive your relief, unless you’re among the roughly 8 million that will qualify for automatic relief. There are a few factors that will determine how much student loan forgiveness you’ll receive. You can review those here.
In addition to student loan forgiveness, the Biden administration proposed a new rule to create an income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers, as well as long-term changes to the Public Service Loan Forgiveness program.
