Wisconsin Borrowers Will Pay Tax on Student Loan Forgiveness

Wisconsin borrowers who receive financial relief through the federal Student Loan Forgiveness plan will have to pay income taxes on the money they receive, costing some of those borrowers hundreds of dollars. Many have responded in opposition to the student loan forgiveness plan entirely.

Wisconsin state law calling for income tax on the forgiveness plan has yet to be changed by the legislature since President Biden’s announcement of up to $20,000 in forgiveness for millions of Americans with student loan debt.

Those who receive the $10,000 baseline for student loan forgiveness can expect to pay around $530 in income taxes.

“I think it’s worth it in the long run, but it sucks to have to pay the tax,” former Lakeshore Technical College student Elliot Middleton said. “Paying off so much money in loans is nice but not everyone has the extra money.”

According to Jared Walczak, vice president of State Projects at the Tax Foundation, Wisconsin is one of 13 states where state law makes student loan forgiveness a taxable income. Federal law allows for borrowers in most other states to receive loan forgiveness money without the tax.

An estimated 715,000 Wisconsin citizens have student loan debt and owe around $23.1 billion, according to Student Success Through Applied Research (SSTAR). Wisconsin is among the five lowest-ranking states in terms of average student loan debt, coming in at an approximated total of $32,230 per borrower.

SSTAR estimated that the average student debt upon graduation from UW-Milwaukee from 2014 to 2018 graduates fluctuated from around $26,519 to $25,610 respectively

At a recent question-and-answer session held at the Milwaukee War Memorial Center, Wisconsin Gov. Tony Evers did not mention the Student Loan Forgiveness Program. But earlier in September, Gov. Tony Evers said on WISN’s UpFront that he does support the forgiveness program, as people will have less to pay off in the long term.

Opposing the loan forgiveness program, the Wisconsin Institute of Law and Liberty (WILL) filed a federal lawsuit against the Biden Administration. According to WILL, the plan could cost $1 trillion in taxpayer money. The U.S. Department of Education (DOE) estimates the forgiveness plan to cost $379 billion, depending on the future economic environment.

The WILL lawsuit claims that the governmental separation of powers is being abused by the president, saying the forgiveness program was created by the executive branch without proper authority.

“Whether this plan is good for America is for Congress to decide,” WILL President and General Counsel Rick Esenberg said in a statement online. “We understand the procedural challenges, but we cannot stand idly by while the President shreds our separation of powers. This can’t become the new normal for Democrats or Republicans. We will fight for the rule of law and take this issue all the way to the United States Supreme Court if necessary.”

The U.S. Supreme Court rejected WILL’s proposal last week, and dismissed their request to halt the loan forgiveness plan.

Reaction from Wisconsin Lawmakers

State Rep. Scott Fitzgerald also opposes the federal forgiveness plan.

“Instead of addressing soaring tuition and the root causes of education becoming more costly, this move simply shifts the burden of $300 billion in debt onto the American taxpayer,” Fitzgerald said in a press release.

State Rep. Gwen Moore supports President Biden’s forgiveness program in hopes that borrowers will be able to make life purchases such as real estate or cars instead of using their money to pay debt.

“We need to reform our current educational model that has created this affordability and debt trap for students, where colleges tuitions rise and rise and students, as a result, are forced to take on increasing debt loads from federally subsidized financial firms,” Moore said in a press release.

A concern of state Rep. Mike Gallagher surrounding the forgiveness program has not been taxation, but the threat of a negative impact on military recruitment. Gallagher was one of 19 members of congress who wrote a letter to President Biden. “By forgiving such a wide swath of loans for borrowers, you are removing any leverage the Department of Defense maintained as one of the fastest and easiest ways to pay for higher education,” he wrote. “We recognize the loan forgiveness programs have issues of their own, but this remains a top recruiting incentive.”

Effects on Students

At UW Milwaukee, students can look to financial aid advisors to answer questions on how to navigate their own situation. Senior Financial Aid Advisor Michael Madouse affirmed that the financial aid office is also anticipating new federal information on the forgiveness plan.

“We will definitely be sharing more. All we have got so far is some automatic responses and redirecting people to information on the Department of Education websites,” Madouse said.

“Navigating student loans is already hard and the forgiveness plan seems like it’s a lot of work,” prospective UW-Milwaukee student Flynn Justice said. According to Madouse, a number of UWM students have reached out to inquire on the program and ask for help signing up for the forgiveness plan. The application is available for students and borrowers on the DOE website and must be submitted on or before Dec. 31, 2023.