FFor some borrowers, the impact of the White House Student Debt Cancellation Program may be influenced by the interpretation and implementation of tax laws.
Several states could end up taxing this relief, creating a situation where borrowers must make a payment of up to $1,000 in the short term due to the long-term financial benefit of cancellation. On November 4, Supreme Court Justice Amy Coney Barrett refused to block the forgiveness plan after two borrowers claimed in a lawsuit that it would force them to pay higher taxes.
To understand how state tax policy might affect eligible borrowers, Bloomberg News spoke with Dorothy Brown, Martin D. Ginsburg Chair in Taxation at Georgetown University Law Center and author of The Whiteness of Wealth: How the Tax System Is Impoverishing Black Americans — and How We Can Fix It.
The conversation began with the recent lawsuit filed by two plaintiffs in Indiana and took place before Coney Barrett’s decision on Friday. The lawsuit was first filed in September with a plaintiff who is an attorney for the libertarian Pacific Legal Foundation; in response, the Ministry of Justice said the government had taken steps to ensure that this person – and anyone else who wanted to – could opt out of the scheme. The latest lawsuit also asked the Supreme Court to act to prevent the reversal from taking effect.
What do you think of the legal challenge that posits that state taxes will negatively impact borrowers whose loans are forgiven?
The Indiana lawyer is going to fail because he claims he will have to pay higher taxes, when he can retire. If you don’t have to get the debt forgiven, you don’t have to pay taxes.
More importantly, there’s this legal doctrine that says you can’t sue if you don’t have what’s called standing, which means there’s a specific harm you’re alleging . There are longstanding cases that basically say you can’t sue as a taxpayer just because your taxes are going to go up. Because if that were the case, you could imagine the lawsuits over Trump’s tax cuts in 2017. The “my taxes will go up” argument flies in the face of many precedents.
Federal law allows this debt relief to be tax-free due to the U.S. bailout that the President signed in March 2021. In any state that immediately complies with federal law, there will be no tax relief. taxes on this.
Two of the states that have said they will mandate student debt forgiveness — and a few states that have said they might — are in the South, which has the highest concentration of black residents in the country. How might taxation disproportionately harm certain groups of people?
It is true that 56% of black Americans live in the South. But of the population whose debt is forgiven in the South, what is this racial demographic? That’s what I would like to know. How many black borrowers are receiving this debt relief and currently living in the South? Do we see black university graduates living elsewhere?
Black borrowers and other borrowers of color are more likely to be Pell Grant recipients, meaning they are eligible for $20,000, compared to $10,000 for some other borrowers. Does it make sense then that if they get the full $20,000 and they live in states that will impose their relief, they will be disproportionately affected?
Absolutely. The tax bill is going to be higher and three-quarters of Pell Grant recipients are black and Latino.
Do you imagine that the immediate burden might be too much for some people to bear?
You must earn less than $125,000 per year if you are single [to qualify for the relief], and we have to talk about how much less than $125,000 these people make. And if they living paycheck to paycheck, then $1,000 [tax] bill you didn’t anticipate will be hard to pay – and people may have to weigh that. Of course, in the long run, [erasing] up to $20,000 might be great, but how are you going to fund that thousand dollars? Are you going to take a loan on your credit card, which will represent a huge interest rate — much higher than on your student debt? Some can afford the luxury of [support from] family members, but research shows that black people generally don’t have access to this intergenerational wealth.
Is it worth weighing whether someone can absorb that extra fee next year before applying?
I would say find a way to pay the taxes and get that debt forgiven. Think about it: $1,000 of a [tax] invoice against $20,000 in debt relief or $500 from a [tax] bill for $10,000 in debt relief. It’s a real pain in the short term, but I think it’s worth bearing.
You noted in congressional testimony last year that black borrowers already pay more taxes than their white counterparts. How could a one-time tax on a student loan add up to other bills?
Every April 15, black Americans pay more than their white counterparts. So this is just another example of a policy that I believe was designed to help black borrowers – and at the federal level helps black borrowers because they don’t pay extra taxes. It is states that often have regressive tax regimes that would hit black borrowers the hardest.
What could states do to make student loan forgiveness fairer?
Just follow the federal rules, which would allow this to be tax free. A state legislature could enact a single measure and essentially say, “Forgiveness will not be taxed.”
And what can the federal government do to help people more?
More student loan debt forgiveness – $10,000 or $20,000 is a good start. Now let’s do a little more.
Student loan debt is a drag. It’s a brake on buying a house, it’s a brake on investing in their future. It’s a drag on the economy, really. If they didn’t have this debt around their necks, they could make better financial plans in the future.
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