RALEIGH, N.C. (WGHP) — The White House’s student loan forgiveness plan may wipe a hefty sum of debt away for many North Carolinians, but it may come with an out-of-pocket cost.
On Wednesday, the North Carolina Department of Revenue confirmed that student loan forgiveness is considered taxable income in North Carolina.
When President Joe Biden introduced the plan, the White House indicated that student loan forgiveness would be excluded from federal income tax. As part of the American Rescue Plan, Congress enacted IRC 108(f)(5) of the Internal Revenue Code to expand the types of student loan forgiveness that would not be treated as taxable income for purposes of federal income tax.
“The North Carolina General Assembly did not adopt Section 108(f)(5) of the IRC for purposes of the state income tax,” NCDOR said in a Wednesday announcement. “Therefore, student loan forgiveness excluded pursuant to IRC 108(f)(5) is currently considered taxable income in North Carolina.”
The General Assembly has the power to change that code, but it is unclear if lawmakers will. The General Assembly did change the state tax laws so that Paycheck Protection Program loans would not be taxable during the pandemic, but that is, of course, no guarantee that lawmakers would do so again for student loan forgiveness. The North Carolina House and Senate are set to convene on Sept. 20.
“The Department of Revenue is monitoring any further enactments by the General Assembly that could change the taxability of student loan forgiveness in North Carolina,” NCDOR said.
For 2022, the North Carolina individual income tax rate is a flat 4.99%. If student loan forgiveness is processed before the end of the year, borrowers who receive $10,000 in forgiveness could be charged an estimated $499 in North Carolina individual income tax. For borrowers who receive $20,000, the estimated North Carolina individual income tax would be $998.
The tax rate is expected to drop to 4.75% for 2023, according to PWC, so that could reduce the tax burden to $475 for recipients of the $10,000 forgiveness or $950 for recipients of the $20,000 forgiveness. That said, federal student loan interest is also planned to resume at the end of 2022.
So the question, then, is: when will student loan forgiveness be processed?
The Education Department plans to launch an application for borrowers that need to submit information sometime in early October 2022, and the deadline is Dec. 31, 2023. We don’t know what the form may look like, but officials have indicated it will be short. After you’ve submitted that form, Education Secretary Miguel Cardona says you can expect relief within four to six weeks.
There have been reports that student loan forgiveness could be automatic for borrowers whose information the Education Department already has. In that case, it’s unclear when forgiveness would be processed.
Until the application opens in October or the Education Department releases more details, there isn’t much borrowers can do. You can, however, register to be notified when the application is available through the Department of Education by filling out this form.