Student Loan Payment Pause Extended: What It Means For CA Borrowers

CALIFORNIA— Student loan borrowers in the Golden State will get another reprieve after the Biden administration said Tuesday it would extend its pandemic-era pause on federal student loan payments while courts decide if the debt relief plan can move forward.

In California, students borrow an average of $34,187 in debt, 7 percent less than the U.S. average of $36,689, according to a report from Lending Tree.

The moratorium was set to expire Jan. 1, a date President Joe Biden set before a lawsuit challenged the program that could potentially deliver thousands of dollars of debt relief to 3,549,300 California borrowers.

“We’re extending the payment pause because it would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay, were it not for the baseless lawsuits brought by Republican officials and special interests,” Education Secretary Miguel Cardona said in a statement.

The pause will continue for another six months, with the first payments due two months after June 30, unless a U.S. Supreme Court decision on the debt relief program comes first.

A three-judge panel of the 8th U.S. Court of Appeals voted unanimously on Nov. 14 to issue an injunction preventing the Biden administration from discharging the debt. In a separate ruling last week, a federal judge struck down the program as unlawful.

About 16 million federal student loan borrowers received letters over the weekend letting them know their applications for debt relief had been approved, but also telling them not to expect money soon.

As many as 40 million borrowers are eligible for the program, which would cancel up to $20,000 in student debt for individuals earning less than $125,000 per year, or less than $250,000 for married couples. The program is expected to cost about $400 billion, according to estimates from the nonpartisan Congressional Budget Office.

The Justice Department last week asked the Supreme Court to examine the issue and reinstate Biden’s debt cancellation plan. The Biden administration has expressed confidence its program will survive, but paused loan forgiveness applications until the court challenges can be resolved.

A note on the government’s student aid website tells borrowers that updates will be posted as they’re available, and that already submitted applications will be held.

Mike Pierce, the executive director of the advocacy group Student Borrower Protection Center, told CBS News the letters help “folks understand a bit better why they haven’t had their debts forgiven yet.”

But, he said, “that doesn’t completely do away with the real economic anxiety that people with student loans feel at this moment.”

Will Californians Be Taxed?

It's complicated.

For those who applied for loan forgiveness, it's important to understand how returned debt could impact taxes.

The $1.9 trillion American Rescue Act COVID package, passed last March, eliminated the federal government's ability to tax forgiven student loans through 2025, but this all depends where you live.

In California, forgiven loan debt can technically be taxed, but lawmakers have urged that residents will not be saddled with such taxes.

"We're not going to leave California's borrowers in the lurch," State Assemblyman Anthony Rendon tweeted last month.

But according to the California Franchise Tax board, technically any debt forgiven is considered gross income. Under some instances, student loan forgiveness is excluded, but it will depend on how the Department of Education administers repayment plans.

The state is still waiting on the department to confirm whether the forgiveness plan will meet the criteria to be tax-free, according to The Sacramento Bee.

"Rest assured, one way or another, California will not tax the federal student debt relief," Rendon said in a joint tweet with Senate President Pro Tem Toni Atkins.

Here's what the state Franchise Tax Board told The Sacramento Bee:

“Forgiveness of student loan debt is generally taxable unless it meets one of the exclusions in California Revenue and Taxation Code sections, which includes an exclusion for income-based repayments and loan cancellation under Section 1098e of the federal Education Code.

“In the case of the federal student loan debt forgiveness announced recently, it does not appear that the student loan forgiveness is occurring under Section 1098e; therefore, the student loan debt forgiveness would be taxable in California.”