BLOOMINGTON, Ill. (WMBD) — As college students get into the swing of things for the fall semester, loans might be at the top of their minds.
Recently, President Biden announced his plan to cancel $10,000 in student debt for borrowers making $125,000 or less a year. And up to $20,000 in forgiveness for borrowers who were Pell grant recipients.
Under the American Rescue Plan, the federal government will not tax student loan forgiveness again until 2025. Several states’ tax plans, including Illinois, are coupled to the federal code, meaning changes at the federal level kick in at the state level.
“When a federal tax change happens, for lack of a better term, Illinois piggybacks on to that,” said the president of Total Income Tax in Peoria, William Sharpe.
However, some state’s plans don’t account for federal changes, meaning unless they pass a bill, borrowers in those states will be taxed by the state on their forgiveness. Sharpe said Indiana is a nearby example of this happening.
Sharpe said this would affect borrowers who attend an Illinois college and have their residence listed as Indiana.
“The real determinant here is, where is your residency,” Sharpe said. “Just because of the fact that you left to attend college, doesn’t make you an Illinois resident, and that by itself.”
Financial adviser Tony Gingerich with Thrivent Heart of Illinois Associates in Bloomington said this will bring some relief to borrowers’ pockets.
“It will obviously free up some cash on a monthly basis for folks which is an opportunity and you know maybe it can help them in some other areas,” Gingerich said.
Biden’s plan only impacts those with federal student loans. Private loan borrowers will still be responsible to pay them off.
Gingerich said many people have a mix of private and federal loans. With one less loan, it means they can pay off other loans or debts faster.
“If a borrower is lets say all their student loans are wiped out and there’s no other consumer debt out there or other debt they want to pay down maybe it is an opportunity for them to look at some type of investment for the long-term, saving more for their future,” Gingerich said.
Wisconsin is another nearby state that will tax loan forgiveness.