Wisconsin borrowers will have to pay taxes on student loan forgiveness

MADISON, Wis. — Wisconsin borrowers will have to pay state taxes on any student loans that are forgiven under the Biden administration policy announced last week.

For those with $10,000 in debt, the tax bill for Wisconsin is expected to be around $530. That is not a small sum, but Jared Walczak with the non-profit Tax Foundation said it is still worth it.

“On the whole, this is a good deal for someone who has debt relief,” he said. “If you get $10,000 worth of debt relief, and you owe $530 in state taxes, it’s still a pretty good deal, but you need to realize it’s coming.”

The difference, according to Walczak, is that the $10,000 debt forgiveness is not money coming into a borrower’s account — so they will have to foot the tax bill out of their own pocket.

Though it does not enter a person’s bank account like a paycheck, the state treats debt forgiveness of any kind as income — like any money made through investments. While the federal government is not taxing the student loan debt relief, Wisconsin has not updated its tax law to be on par with the federal government.

The state could change that before Wisconsinites file for taxes next year, but the Legislature would have to make that change and is not likely to come back before the beginning of next year.

For its part, the state Department of Revenue said through a spokesperson that it will ask the Legislature not to tax the student loan debt forgiveness. The department will do so during its next budget request, which will land on legislators’ desks sometime next spring.

For individual borrowers, Walczak said the forgiven debt will likely be taxed at their existing tax bracket.

“Someone could, for instance, have been in grad school or law school and 2020 and now have a successful practice — they could be in that higher bracket, but that’s not going to be the typical recipient,” he said.