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The Daily Tar Heel

North Carolina to tax student loan forgiveness as income

DTH Photo Illustration. A student checks their empty wallet while looking at student loan interest rates and the IRS website.

On Aug. 31, the North Carolina Department of Revenue announced forgiven student loans are still considered taxable income under state law.

The Biden administration announced on Aug. 24 it would be forgiving up to $20,000 in student loans. It also stated that the forgiven debt would not be treated as taxable income and would be exempt from federal income tax. 

This is due in part to Section 108(f)(5) of the Internal Revenue Code– enacted by Congress under the American Rescue Plan act – which expanded what types of student loan forgiveness would be exempt from federal income taxes.

However, the NCDOR stated in a press release that the N.C. General Assembly did not adopt this statute, meaning the state could still tax the loan forgiveness as income.

Under the Biden administration's plan, individuals that earn less than $125,000 or married couples that earn less than $250,000  per year qualify for debt cancellation.

Those who receive federal Pell Grants — aid for undergraduate students with “exceptional financial need” — will be awarded up to $20,000 in debt cancellation. Non-Pell Grant borrowers will receive up to $10,000.

In a Sept. 14 press release, Gov. Roy Cooper urged Republican legislators to exempt forgiven student loans from state income taxes. 

William Goldsmith, a teaching assistant professor of public policy at UNC, said that this topic is likely one Republicans will steer clear of and Democrats will lean into for the upcoming election season.

He said while income taxes are lower at the state level, he understands students’ frustrations about having to pay income tax.

“I definitely see why those who would have to pay these taxes would feel outraged by it,” Goldsmith said.

UNC student Julianna Beltz, who has student loans, said that loan forgiveness makes a big difference for those who are unable to work full-time.

“I think it’s important that we are students first and not workers first,” Beltz said. “Because often people are working two jobs or three jobs just to be in order to pay for their education, and that’s not their main focus.”

Beltz said students not only accumulate debt while in school, but that beginning wages are not enough to pay it off. She said she would like to see a better system for taking out loans.

This issue extends beyond students who graduate with debt. The Education Data Initiative found that up 32.9 percent of undergraduates do not finish their degree program, and nearly one-third of borrowers with student debt do not have a degree – many of whom could not afford to stay in school.

While the college dropout rate in North Carolina is lower than the national average, more than 1 million North Carolina residents have completed some college but did not get a degree, the Education Data Initiative reported. 

N.C. Secretary of Commerce Machelle Baker said that considering the labor supply challenges that the state is facing, it is important to keep students in the state and in school. She said the state should be encouraging young people to stay, not leave and avoid taxation.

"We also know that many of these students who may be from underserved, underresourced beginnings are surely going to be impacted," Baker said.

She said loan forgiveness not only affects students but also influences economic growth and prosperity for businesses in the state.

Goldsmith said Biden’s executive order was passed after the N.C. General Assembly finished its legislative session for the year. He added that it is unlikely for a special session to be called to discuss the issue.

He said residents who want the N.C. General Assembly to pay attention to this issue should reach out to legislators to help put it on the agenda.

Those eligible for student loan forgiveness can apply beginning in October. Applications are due by Dec. 31, 2023.

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