Federal student loan borrowers are preparing for some significant relief after president Joe Biden announced last month the government will forgive up to $10,000 for borrowers and up to $20,000 for Pell grant recipients. 

But in a handful of states, borrowers may have to pay taxes on that relief.

What You Need To Know

  • Federal student loan borrowers are preparing for some significant relief after president Joe Biden announced last month the government will forgive up to $10,000 and $20,000

  • But in a handful of states, including North Carolina, borrowers may have to pay taxes on that relief

  • North Carolina is one of just seven states that is set to tax student debt forgiveness, according to the Tax Foundation Vice President of State Projects Jared Walczak
  • To address the issue, state legislators would need to take action

It’s been a few years since Robert Stephens graduated college, but with more than $70,000 in student loans, he’s always reminded of school.

While he was hoping for more relief than the $10,000 announced by president Joe Biden last month, he feels some forgiveness was better than none. 

But Stephens, who lives in Durham, North Carolina, may not actually get the full $10,000 because the Tar Heel State is one of a few that may end up taxing student loan forgiveness.

"I was exceptionally surprised," Stephens told Spectrum News. 

That means borrowers receiving the full $10,000 in forgiveness who pay North Carolina’s 2022 income tax rate of 4.99% would be on the hook for $499 in additional income tax next year.

The state is one of just seven that is set to tax student debt forgiveness, according to Jared Walczak from the Tax Foundation, a think-tank that studies tax policies at the state and federal level.

"It’s not really a surprise," Walczak told Spectrum News. "It’s just a quirk of how the state tax codes work."

When Congress passed President Biden's $1.9 trillion COVID relief bill, which temporarily exempted student debt forgiveness from federal taxes, many states followed suit. At the time, North Carolina wasn’t one of them.

"Indiana and North Carolina are interesting cases where after the change was made at the federal level with the American Rescue Plan, they decoupled from certain provisions of that," Walczak said. 

Walczak says for the other states, it’s more about how they do tax conformity.

California, which is on the list of seven states, says it will make sure borrowers aren’t taxed.

But in North Carolina, the tax looks like it will stay in place, and action would have to be taken in the state's legislature.

"Our law is long settled that debt forgiveness is a taxable event, whether that forgiveness is from a debt obligation owed to the government for an educational loan or a debt obligation owed to a private lender for a home or consumer loan,” spokesman Randy Brechbiel for Phil Berger, the President pro tempore of the North Carolina Senate, told Spectrum News. "To change the law for one type of debt would be the height of unfairness to all others."

But that answer will likely not sit well for borrowers like Stephens, who told lawmakers that if they "don’t effectively address this, when we go to the polls, we’ll remember."

While borrowers will be on the hook for hundreds, rather than the thousands they once owed, Stephens says the impact will still be felt.

"It will cause a lot of people, myself included, to have to make some decisions like how do we approach life, what bills are we going to pay," Stephens continued. 

If the general assembly were to take action, it would need to do so before April 15, 2023.