Democratic state lawmakers aim to eliminate what they called a “tax bomb” — or unforeseen taxes on student loan forgiveness — in a proposal released Tuesday.
Sen. Kelda Roys of Madison and Sen. Jeff Smith of Brunswick, along with Rep. Deb Andraca of Whitefish Bay and Rep. Alex Joers of Middleton, said the bill would exclude student loans from Wisconsin state income tax by adopting the student debt loan relief tax exclusion passed under the federal American Rescue Plan Act of 2021.
Under federal law, the student loan debt relief tax exclusion expires after the 2025 tax year. The bill would extend the exclusion for state tax purposes beyond the 2025 tax year.
“Wisconsinites who work hard to pay down their loans through income-driven repayment plans shouldn’t receive a surprise tax bill after their many dedicated years of payments,” the lawmakers said in a joint statement Tuesday.
Income-driven repayment plans adjust monthly payments on all federal student loans based on a borrower’s income and family size, with the promise of loan forgiveness after an extended period of time.
In Wisconsin, the amount of debt forgiven from an income-driven repayment plan is considered gross income and is taxed. At a federal level, the amount of debt forgiven is not taxable as modified by the American Rescue Act.
Lawmakers tell the Cardinal varying standpoints
Previously, Andraca and Roys sought to eliminate the tax burden in two amendments, one to the Senate and the other to the Joint Finance Committee. Both were blocked by Republicans.
Andraca told The Daily Cardinal in November students having their loans forgiven in a federal forgiveness plan would “probably not” be aware of state income taxes on their student loans in Wisconsin.
In 2021, the Biden administration proposed forgiving $10,000 in student debt for over 40 million borrowers. By January 2023, Wisconsin received 465,00 forgiveness applications, with 302,000 sent to loan servicers.
But in July, the conservative-leaning U.S. Supreme Court blocked Biden’s loan forgiveness, ruling it an overreach of the president’s power that required approval from Congress. In response, Biden turned to other programs like the Saving on a Valuable Education (SAVE) plan which alleviates debt based on income and family size rather than their loan balance.
The Wisconsin Department of Financial Institutions (DFI) Secretary Cheryll Olson-Collins said in a November webinar over 700,000 students are loan borrowers in Wisconsin, totaling $23.2 billion in overall debt.
Gov. Tony Evers told the Cardinal in January he would like to reduce student debt in Wisconsin but that loan forgiveness is not accessible for Wisconsinites.
Even then, most are “not aware” of the tax, he added.
“Are they? No. Should they be? Yes. Or at least [should be] minimized,” Evers said when asked if student loans in Wisconsin are being forgiven.
The new proposal may be referred to the Republican-led Joint Survey Committee on Tax Exemptions, according to the bill.
Assembly Speaker Robin Vos, R-Rochester, told the Cardinal in November he will not take up a bill until Congress approves student loan forgiveness. Vos said he did not think students were receiving loan forgiveness.
Ava Menkes is the state news editor at The Daily Cardinal. She has covered multiple stories about Wisconsin politics and written in-depth about nurses unions and youth voter turnout. Follow her on Twitter at @AvaMenkes.