Governor Gavin Newsom on Saturday called for the Legislature to take early action to ensure any federal student debt relief provided to Californians would not be subject to state taxes, unlike uncollected credit card debt. The proposal will be part of Newsom’s budget, which will be released in January.
“Californians who get student debt relief shouldn’t be hit with taxes for it. This will provide up to $1.3 billion in tax relief for more than 3.5 million Californians,” Newsom said, in a news release. “I look forward to working closely with the legislature to get this done through early action.”
California has nearly 3,550,000 eligible borrowers, of which an estimated 2,340,600 are Pell Grant borrowers.
Estimates have shown that waiving state taxes on forgiven student loan debt will result in about $1.3 billion less in state revenue. Individually, student loan borrowers will save on average hundreds of dollars in state taxes, and could even save as much as $1,860.
Under President Biden’s proposal, the federal government is poised to forgive up to $10,000 in student loans for individuals making less than $125,000 per year and up to $20,000 for those who received a Pell Grant, meant for students with the largest financial need. The federal cost to taxpayers is estimated to be $400 billion.
Biden’s American Rescue Plan also exempts the forgiveness of student loan debt from 2021 to 2025 federal income taxes.
The federal government is still accepting applications for student loan forgiveness, despite the program being on hold due to a court challenge by six states claiming a lack of congressional authorization for the administration’s action.