Last month, President Joe Biden announced a plan to cancel a significant portion of student debt for millions of Americans. The U.S. Department of Education will cancel up to $20,000 of student debt for many Pell grant recipients and up to $10,000 of student debt for many other borrowers. To qualify for this student debt relief, borrowers must have incomes of $125,000 or less per year for individuals or $250,000 per year for married couples. Thousands of nonprofit employees in North Carolina are expected to qualify for student loan forgiveness under the debt cancellation plan. The Education Department recently published FAQs addressing some common questions about debt cancellation, including the process for applying for cancellation, how debt cancellation works for borrowers in the Public Service Loan Forgiveness (PSLF) program, and how remaining loan balances will be treated after cancellation. The online debt cancellation application form is expected to be available next month.
Nonprofit employees who receive student loan forgiveness will need to be aware of the tax implications of their cancelled student debt. A provision of the 2021 American Rescue Act Plan excludes student loan forgiveness from income for federal tax purposes, meaning borrowers – including nonprofit employees – who receive debt cancellation will not need to pay federal income tax on the amount of their student loans that are forgiven. However, the NC Department of Revenue recently clarified that student loan forgiveness is taxable income for the purposes of state income taxes, so borrowers will need to pay state income tax on the amount of their student loans that are forgiven. Unless the NC General Assembly changes this law next year, North Carolina will be one of only seven states to tax borrowers’ student loan forgiveness.