Biden's Student Loan Forgiveness: You Can Opt Out if You Want To

Following a student loan debt relief lawsuit, the Department of Education says that borrowers can opt out of President Biden’s student loan forgiveness plan.

Yes and no written on black chalkboard
(Image credit: Getty Images)

Legal challenges are mounting against President Biden’s student loan forgiveness plan to offer up to $10,000 of student loan debt relief for eligible borrowers, and up to $20,000 in student loan forgiveness for Pell Grant recipients. The first student loan debt relief lawsuit was recently filed by the Pacific Legal Foundation, a libertarian group in California.

That organization argues that student loan borrowers in states that could or will tax forgiven student loan debt would be worse off than other borrowers, because of Biden’s student loan forgiveness. However, the Department of Justice says that federal student loan forgiveness doesn’t create an “automatic” tax penalty because borrowers aren’t required to have their student loans forgiven.

Why does this matter? Well, the Pacific Legal Foundation’s challenge raises important questions concerning states that will or might tax forgiven student loan debt (you might live in one of them), and whether you have to accept student loan debt forgiveness.

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Did You Know You Can Decline Student Loan Forgiveness?

The lead plaintiff in the student loan debt relief case is a Pacific Legal Foundation attorney, Frank Garrison. Garrison argued that an Indiana state tax on forgiven student loan debt would amount to immediate tax liability and an unfair penalty. As an Indiana taxpayer, he asked the court to invalidate President Biden’s student loan debt cancellation program and pointed to at least six other states where, Garrison said, borrowers could be similarly harmed.

The federal government responded to the lawsuit by saying that borrowers, who are eligible for so called “automatic” debt relief, can opt out of Biden’s student loan forgiveness plan, and avoid paying state taxes on the cancelled debt. In other words, you can keep you student loan debt—if you want to.

As a result of the opt-out, a federal judge recently denied Pacific Legal Foundation’s motion to block President Biden’s student loan forgiveness and dismissed the organization's claim.

But this case means that going forward, it could be difficult for a borrower to claim that state tax has been unfairly or automatically imposed merely because of Biden’s student loan relief. The student loan forgiveness opt out basically allows the federal government to say that the borrower chooses whether to have forgiven student loan debt in the first place. That would make any tax “penalty” a state issue.

Another challenge with this case is that the lead plaintiff, Garrison, hasn’t yet paid any state tax on forgiven student loan debt. So, it was unclear whether there’s sufficient legal harm to justify stopping President Biden’s student loan forgiveness program. However, that could potentially change once student loans are forgiven and some states impose tax liability on the cancelled debt.

Will Your State Tax Forgiven Student Loan Debt?

You may be wondering why someone would want to decline $10,000 to $20,000 of student loan debt forgiveness. There could be many reasons, but this particular legal case points to the idea that borrowers in states that will or could tax student loan forgiveness might not want to pay additional state taxes.

Right now, whether some states will tax forgiven student loans is an evolving situation. But a few states have confirmed that they will tax cancelled student loan debt (e.g., Indiana, Mississippi, and North Carolina). In Indiana (where the lead plaintiff in the Pacific Legal Foundation case reportedly resides), the potential tax on $10,000 of forgiven student loan debt could be as high as $1,000.

If you live in Mississippi, as another example, the maximum amount of state tax liability would be $500. However, these calculations assume that you are eligible for the full $10,000 of loan forgiveness for individuals with income under $125,000 a year. And if you are a Pell Grant recipient in a state that could or will tax forgiven student loan debt, and are eligible for up to $20,000 in student loan relief under President Biden’s plan, your state tax liability could be higher.

There are other states that could or will tax cancelled student loan debt. However, as of now, most states plan to conform to the Federal government’s stance that most forgiven student loan debt is not taxable through 2025.

How to Apply for 2022 Student Loan Forgiveness

On its website, the Department of Education says, if borrowers would like to opt out of student loan debt relief for any reason, they will be given an opportunity to do so. However, it’s unclear at this point, exactly how opting out of student loan debt relief will work.

Additionally, the Biden administration has said that most borrowers will have to apply to receive student loan forgiveness. This is important because it means that an application is an affirmative step that the borrower must take in the process. (That could also make it harder for borrowers to succeed with legal claims alleging that the federal government forced them to receive student loan debt forgiveness.)

All this means that if you don’t want student loan debt relief, you should keep an eye out for more specific information from the Department of Education on how to opt out. Or you can contact your loan servicer for guidance.

Information on how to apply for the 2022 student loan forgiveness, including applications and instructions for student debt relief—and likely more guidance on opting out—are expected soon from the Department of Education.

Kelley R. Taylor
Tax Editor,

With more than 20 years experience as an in-house legal counsel and business journalist, Kelley R. Taylor has contributed to numerous national print and digital magazines on key issues spanning education, law, health, finance, and tax. Kelley particularly enjoys translating complex information in ways that help empower people in their daily lives and work.