COLUMBUS, Ohio (WCMH) — Ohioans with recently canceled federal student loans won’t see their debt taxed, at least for now.
After President Joe Biden announced up to $20,000 in student debt relief for up to 43 million borrowers in August, states including Indiana said North Carolina said they would consider canceled student loans as taxable income. Current Ohio law, however, bars the state from taxing “this type of financial windfall,” according to a spokesperson for Gov. Mike DeWine.
“I don’t think there would be any interest in the Senate to tax something like that,” said State Sen. Steve Huffman (R-Tipp City), who is backing a bill to repeal the state’s personal income tax.
Forgiven student loans will not be subject to a federal income tax, either, because the American Rescue Plan Act of 2021 made student loan debt tax-free until 2025, according to a fact sheet from the White House.
Who qualifies under Biden’s debt relief plan?
Under Biden’s debt cancelation plan, the Department of Education is expected to shell out an estimated $500 billion for up to 43 million borrowers across the U.S.
- $10,000 in debt relief to non-Pell Grant recipients
- $20,000 in debt relief to Pell Grant recipients
- Borrowers must make less than $125,000 in individual income, or $250,000 for married couples, to qualify
While Biden contends the plan will combat “the financial harms of the pandemic,” Logan Kolas, economic policy analyst at The Buckeye Institute in Columbus said he has a number of reservations with canceling student debt.
No. 1, it’s expensive, Kolas said. The $500 billion estimated price tag, according to the Committee for a Responsible Federal Budget, “would completely wipe out” the effects of Biden’s Inflation Reduction Act over 10 years, Kolas said.
Canceling debt could drive impacted borrowers and future students to take on riskier debt in the future, he said, and dishing out dollars to graduates who will likely earn larger salaries than their non-college-educated peers raises the question of fairness.
“You’re asking people who never went to college … to subsidize those people who are expected to make more money in the future,” Kolas said.
But Piet van Lier, a senior researcher at Policy Matters Ohio, called Biden’s debt cancelation a win for Ohio — where 15% of the population, or 1.7 million people, have student loans — and for those bogged down by debt payments who otherwise could be stimulating the economy.
The average borrower in Ohio owes $34,923 of student loan debt, according to the Ohio Department of Education. Black and brown borrowers, who van Lier said on average take longer to pay off their debt in full, will especially benefit from Biden’s plan.
“It will help a lot of people get past the burden of debt that’s holding them back and holding our economy back, as those borrowers have to pay into a debt service as opposed to a house or their kid’s education,” van Lier said.
How could taxing student loan debt impact Ohio?
Failing to consider student loan debt as taxable income, Kolas said, means less revenue gains for Ohio, which made nearly $11 billion from the state income tax in 2021, according to the Ohio Department of Taxation.
Ohio might recoup some of the losses from increased sales tax profits — since Ohioans with canceled debt will have more money to spend — but Kolas said the massive federal spending required under Biden’s plan will raise inflation and taxes regardless of whether canceled debt is taxed.
“It’s poorly mistimed policy,” he said.
The tax revenue that Ohio would generate on taxing student loan debt tax canceled student loans would amount to “nickels and dimes,” van Lier said, and is not a policy worth pursuing.
In Indiana, for instance, the state’s tax rate is 3.23%, meaning those eligible for $10,000 in relief will pay $323 in taxes, according to the Associated Press. Pell Grant recipients awarded $20,000 in relief could owe $646.
Instead of imposing an additional tax on borrowers who make less than $150,000 a year, van Lier said the Buckeye State should reconsider dishing out what Policy Matters Ohio found to be nearly $10 billion in annual tax breaks that it awards to big businesses.
“Going after people who have had some student loan debt canceled is not good policy,” van Lier said. “Any benefits of loan cancelation are going to be lost because you’re trying to tax people who are already struggling.”