Gov. Gavin Newsom is urging the California State Legislature to waive taxes on student debt relief. California is included in the list of states — North Carolina, Wisconsin, Missouri, Arkansas, Indiana and Minnesota — that are planning to tax borrowers on the relief. 

STATES DECIDE

Borrowers will not face federal taxes, but each state has the liberty to decide its course of action. New York and Pennsylvania have decided that loan forgiveness will not be taxable income. In previous years, student debt cancellation qualified as taxable income on a federal and state level. 

California, however, aims to eliminate student debt relief taxes. Nearly 3.5 million borrowers would be affected by the decision. If California waives the taxes on student debt cancellation, it is estimated that borrowers will save a little more than $1,000. 

“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 press release.

According to the National Public Radio, borrowers could be taxed 5% of their total cancellation. 

DEBT CANCELLATION TAXES

Some borrowers opted out of the debt cancellation to avoid taxes; however, a majority of the states will not impose state income taxes on the cancellation.

Some states have decided whether to charge borrowers the state tax, but a few are still deciding whether to charge borrowers the state tax. Gov. Newsom’s proposal to waive state taxes for California borrowers is expected to officially release in January. 

“I look forward to working closely with the legislature to get this done through early action,” Newsom said.