An Entrepreneur’s Guide to Student Loan Debt Forgiveness and Taxes
Student loan debt repayment can be a huge financial burden on low and middle income taxpayers. If you’re hoping to quit your 9-5 job and jump-start your entrepreneurial career, having that debt hanging over your head can make the prospect even more daunting. Student loan debt can reduce the amount of cash you have available to start a business or affect your credit score, making it harder for you to secure a business loan. In fact, a 2020 study by the Ewing Marion Kauffman Foundation showed that almost half of recent college graduates surveyed felt that their student loan debt affected their ability to pursue an entrepreneurial passion.
If you’ve recently started your own business, or you’re thinking about taking the leap, you might be wondering how the recent news about student loan debt forgiveness affects you and your entrepreneurial dreams. The Biden administration’s multi-part plan to provide student loan repayment relief for working and middle-class Americans will affect up to 43 million taxpayers. Designed to ease the burden of student loan debt by forgiving some debt and restructuring the payments of the remaining payments, the plan also raises a host of questions. Below, we’ve taken a look at some basic questions about the plan, as well as the tax implications for eligible taxpayers.
How do I know if I am eligible for student loan forgiveness under Biden’s plan?
Income limits apply when it comes to student loan forgiveness. Single borrowers making less than $125,000 per year and married borrowers with a combined income of less than $250,000 may be eligible to receive up to $10,000 of their student loan borrowings forgiven per borrower.
Borrowers from lower-income families who have received Pell grants may be eligible for an additional $10,000 in debt relief.
It’s important to note that this student loan forgiveness only applies to federal loans. If you have college loans through private sources such as a bank, those loans are not eligible for this program. It’s also important to know that loans must be taken out before July 2022 to qualify for this debt forgiveness program.
How will my debt relief affect my taxes?
It’s not every day that you have a debt canceled or forgiven, so you may not know that debt relief can often be treated as additional taxable income. This can be an unpleasant surprise at tax time for many. In this case, however, the American Rescue Plan Act specifies that forgiveness of student loans will not count as additional federal income. But when it comes to state taxation, the story can be a little different. Check the list below to see how your state is handling student loan debt forgiveness, but remember that information can change, and you should always verify your state’s tax laws with your state agency or a tax professional (we know some good ones!)when you file your taxes.
Which states are counting student loan debt forgiveness as taxable income?
The majority of states use the same income definitions as the federal government, meaning that if something is treated as income for your federal tax return, it is also treated as income on your state tax return (and vice versa). At the time this article was written, however, there are 7 states that are bucking this trend and counting student loan debt forgiveness as taxable income:
- North Carolina
Where can I learn more about the Biden Administration’s student loan relief plan ?
We’ve assembled some resources below to give you more information on the plan. We’ve also got tax experts who specialize in helping entrepreneurs and small business owners standing by to help—scheduling a call is as easy as clicking here to get started.. So check out these additional resources and reach out if you’re ready—we’re here to help.