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Minnesota lawmakers back waiving taxes on student loan forgiveness

Minnesota is among a group of states that have not conformed their codes to a federal law exempting student loan debt forgiveness from taxes. Changing that has bipartisan backing, but any action will likely have to wait until January when lawmakers return to the capitol in St. Paul for the regular session.

College graduation
(2009 file / News Tribune)
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ST. PAUL — Minnesota is among a group of states that could tax student loan debt forgiveness from a new plan announced by President Joe Biden. And while state lawmakers of both parties have expressed interest in passing legislation to address the issue, whether political dynamics at the Capitol will allow that to happen very soon is a completely different question.

Under the American Rescue Plan Act passed by Congress in 2021, the federal government won't count student loan debt forgiveness as taxable income until 2025. But while the federal government has waived loan forgiveness, Minnesota and Wisconsin are among the states that have not conformed to the new tax standard, according to an analysis from the Tax Foundation , a Washington, D.C.-based think tank.

The Biden student debt relief plan, which could possibly face a legal challenge from Republican opponents, would forgive up to $10,000 in student loan debt for borrowers who earn less than $125,000 a year ($250,000 for couples) and up to $20,000 for Pell Grant recipients, who typically showed exceptional financial need when applying for financial aid.

According to an initial estimate from the Tax Foundation, if a Minnesota borrower received $10,000 of relief, they could face up to $985 in additional taxes. However, the Minnesota Department of Revenue said the actual amount owed could vary widely by each taxpayer’s income and other factors.

According to one estimate, taxpayers who get loan relief could owe $500-800. Revenue Department spokesman Ryan Brown said his agency is still finalizing its estimates on how the debt relief might affect different taxpayers and hopes to have more details soon.

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In the Republican-controlled Minnesota Senate, lawmakers of both parties have expressed interest in revisiting the state’s tax code in order to exempt student debt forgiveness from taxation. Despite some Republicans’ misgivings about Biden’s student debt forgiveness plan, Senate Majority Leader Jeremy Miller expressed interest in a change.

“We often try to conform to the federal tax code for ease and convenience of taxpayers,” he said in a statement. “It’s something we can take a look at when we are back in session.”

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Michels, who has repeatedly said he opposes exceptions, said Friday, Sept. 23, he would support them as governor.

Sens. Kari Dziedzic and Ann Rest, Democratic-Farmer-Labor senators from the Twin Cities metro area and ranking members of the senate's tax committee, also expressed support for the change.

“Whether we do it in a special session this year, or when the legislature returns in January, we will push to ensure student loan relief is not taxed,” Dziedzic said in a Tuesday statement.

Key House lawmakers and Gov. Tim Walz have also expressed support for exempting student debt relief from state taxes, but for now, the issue will likely have to wait until 2023.

The DFL-controlled House and GOP-controlled Senate could not reach an agreement on most significant bills when the Minnesota Legislature ended its regular session in May. One of those major bills was a tax policy package that included changes to the state tax code to exempt student loan debt forgiveness from taxes. 

Following the end of session, legislative leaders and the governor negotiated for weeks on a plan for lawmakers to return to the capitol for a special session in the hopes they could hammer out more details on a framework for a deal to pass $4 billion in tax cuts and $4 billion in spending proposals. But those negotiations fell apart in June, and much of the state's projected $9.3 billion surplus remains on the table.

Now, two months out from the general election where Walz faces a challenge from GOP gubernatorial nominee Scott Jensen, those negotiations don’t appear anywhere close to opening again. Walz called for a special session a few times over the summer, and in late August, a group of 17 local government organizations called for a special session for lawmakers to return and complete unfinished business. 

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But so far, legislators have not budged, and barring a significant change in course, the issue will likely remain unaddressed until January.

Alex Derosier covers Minnesota breaking news and state government for Forum News Service.
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