To the relief of millions of people who took out loans to pay for college, President Joe Biden recently announced a life-altering $10,000-per-person student loan debt cancellation plan, to be implemented by the end of the year. That sounded great to the more than 45 million people carrying trillions in student loan debt.
But now, if you live in Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin, mundane tax statutes could mean you’ll still get a tax bill on your forgiven debt. And that pisses off Sen. Elizabeth Warren (D-MA).
“I feel really frustrated by this,” Warren said in a phone interview with Jezebel on Friday. “The states had not anticipated revenue from student debt cancelation. The people who are getting the cancellation are disproportionately working families. Ninety percent of the benefits are going to people who family incomes are under $75,000. States should want to help those people—not try to find a way to punish them.”
Before Biden’s life-altering policy announcement last month, the nonprofit Tax Foundation initially said 13 states could tax the debt cancellation, including Warren’s own Massachusetts. While that’s down to only five states, now, Warren says it’s five too many. “Now, the groups that pulled together to help us persuade the president to cancel student loan debt are having to gear up to persuade state legislatures not to tax the cancellation,” Warren told me.
Another roadbump is that Republican politicians are looking for ways to legally challenge the debt cancellation. Nothing has been filed yet, so don’t completely panic; but if the state attorneys general find a way to challenge the policy, it could create immediate headaches for everyone obsessively refreshing their student loan servicer’s website, as a legal challenge makes it through the courts. “That’s just totally backwards from the kind country we want to be,” Warren said.
Warren, while running for president in 2020 (was I ever that young), advocated for a day one cancellation of up to $50,000 in student loan debt. Biden’s plan will cancel up to $10,000 for people making less than $125,000 for individuals and $250,000 for married couples. Pell Grant recipients can see up to $20,000 in loan forgiveness: a great and life-changing amount! Getting lost in that positive sticker shock is changes to the income-driven repayment (IDR) plan. Until Biden’s announcement, people were paying 10 percent of their income; now, monthly payments on undergraduate loans are capped at 5 percent of discretionary income.
“Student loan debt repayment before was always focused on how much money you borrowed. The more you borrow, the bigger your payment was. The problem, of course, is that the poorer you are, the more you borrow,” Warren told Jezebel. “So people who came from families who needed the most help ended up with the biggest monthly payments after they finished school.”
About one-third of borrowers have no degree to show for their debt, according to the White House. “Those people are choking on debt. The president’s debt cancellation will help millions of them steady themselves financially,” Warren told Jezebel. “But the IDR program going forward means that none of them, none of the people who enter programs in the future will have to go through debt hell on the other side.”