Student Loan Debt Forgiveness Will Not Incur Federal or New Jersey Taxes
Typical New Jersey Undergraduate Student Has About $35,000 in Student Loan Debt; New Jerseyans Collectively Have $42.5 Billion Total Debt
The New Jersey Society of Certified Public Accountants (NJCPA) is reminding New Jersey taxpayers that the new Student Loan Relief plan signed into law by President Biden on Aug. 24 will not incur federal income tax or New Jersey state income tax.
The three-part plan includes the following:
- Provide targeted debt relief to address the financial harms of the pandemic by:
- Canceling up to $20,000 in student loan debt of Pell Grant recipients who earn less than $125,000 annually ($250,000 married couples).
- Canceling up to $10,000 in debt for those Americans earning $125,000 annually ($250,000 married couples).
- Extending the pause on federal student loan repayment one final time through Dec. 31, 2022. Borrowers should expect to resume payments in January 2023.
- Make the student loan system more manageable for current and future borrowers by:
- Cutting monthly payments in half for undergraduate loans.
- Fixing the broken Public Service Loan Forgiveness (PSLF) program by proposing a rule that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal or local government, receive appropriate credit toward loan forgiveness.
- Protect future students and taxpayers by reducing the cost of college and holding schools accountable when they raise prices.
While some states consider student loan debt forgiveness taxable income, it is not taxable in New Jersey. According to the New Jersey Division of Taxation, the cancellation of debt is not a category of income under the Gross Income Tax Act. Therefore, income from the discharge of any business or personal indebtedness is not taxable for New Jersey gross income tax purposes.
On the federal level, the American Rescue Plan of 2021 made student loan forgiveness tax-free through 2025 — and the law covers Biden’s forgiveness too, according to a fact sheet from the White House.
“This is a commendable plan to assist those just starting out in their careers who may have considerably high amounts of debt or those who have been out of college a few years and are still struggling with repayment,” said Ralph Albert Thomas, CPA (DC), CGMA, CEO and executive director at the NJCPA. “In recognition of the debt burdens of our own members, the NJCPA created a Student Loan Debt Task force and initiated a Student Loan Debt Lottery,” he added.
The typical New Jersey undergraduate student has about $35,000 in debt, collectively bringing New Jerseyans' total student loan debt burden to $42.5 billion, according to the latest data from Education Data Initiative.