Governor Gavin Newsom on Saturday called on the California Legislature to act quickly to prevent student borrowers from having to pay state income taxes on up to $20,000 in federal debt forgiveness.
The Biden administration announced a massive, one-time loan forgiveness program in August that would erase thousands of dollars of direct federal debt. Borrowers who meet the program’s income limits — less than $125,000 for an individual or $250,000 for a couple — will have up to $10,000 in debt forgiven, or up to $20,000 if they received a federal Pell grant.
Tax authorities treat canceled debt in many cases as income. Under federal law, amounts reversed under the Biden initiative will be disregarded by the Internal Revenue Service. But under current state law, analysts say, they will be treated as taxable income in California.
Newsom said the draft budget he will submit in January will include a proposal to exempt the canceled debt from state taxes. The change would save more than 3.5 million borrowers in the state — including more than 2.3 million Pell Grant recipients — up to $1.3 billion, he said.
“California people who get student debt relief shouldn’t be hit with taxes for it,” Newsom said in a statement. “I look forward to working closely with the Legislative Assembly to achieve this through prompt action.”
Newsom’s position aligns him with the top Democrats in the Legislative Assembly. The leaders of the National Assembly and the Senate tweeted in September that they would ensure that the amounts remitted are not taxable.
The US Department of Education began accepting loan forgiveness applications last month and is expected to begin canceling debt by the end of the year. But legal wrangling has clouded his future.
The program is being challenged in several courts across the country by Republican officials and conservative groups. Although judges blocked at least two of the cases because the plaintiffs lacked standing to sue, a federal appeals court temporarily blocked the Department of Education from canceling the loans while it considers the claim of six GOP-led states for an injunction against debt relief.
The ministry said it will continue to process applications and identify borrowers who automatically qualify for the debt relief program as the legal fight continues.