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State responses to Biden student loan decision

Last month, the Biden Administration announced a student loan debt forgiveness plan with a cap of $10,000 increasing to $20,000 if the student is a Pell Grant recipient. Though this was a federal decision, the impact in the states highlights how federal actions reverberate throughout the country. Billions in federal spending in the form of forgiveness could amplify existing inflation issues by encouraging more demand and spending. States like Kansas have decisions to make that will impact state tax liabilities, tuition hikes, and other ripple effects from this federal decision.

The plan, which has an average cost of $2,100 per taxpayer, may seem like a good idea, but doesn’t solve the permeating issue of skyrocketing high education costs – in fact, subsidized loans give universities a greater incentive to increase their tuition costs if they know the federal government is going to foot the bill. Since 1991, federal higher education aid has increased 295%; at the same time, fees and tuition at universities have more than doubled. A study of non-degree programs from 2005-2009 found that programs eligible for financial aid increased tuition 78% more than programs that weren’t. A never-ending increase in cost means that the student loan hole is dug deeper and deeper.

The plan’s legal basis hinges on expanded funding powers of the federal government to deal with the COVID-19 pandemic. Even that is up in the air now as President Biden has declared “the pandemic is over,” calling into question if expanded COVID-19 funding should be as well.

One-way states may differ in how the federal handout is handled is in whether the forgiven debt is treated as personal income and thus subject to taxation. The Department of Education and  IRS currently view many forms of debt forgiveness as taxable income, though the Biden Administration has stated that at the federal level, it will not be. However, things start to get inconsistent at the state level. Residents of six states are currently set to have these “debt forgiveness” taxes. In these states, pending some change, someone with the maximum of $20,000 forgiven will see their taxes goes up by $500 to $985. The Kansas Department of Revenue has indicated that it will not treat the forgiven debt as taxable income. That means Kansans receiving Biden’s largess won’t have an additional tax liability.

As mentioned before, perhaps the biggest consequence will be that colleges will keep ticking their prices up, making affording education even harder in the future. Between 2002 and 2021, the University of Kansas had a 310% increase in tuition – between 2002 and 2019, spending per student increased by 90%.

There’s a multitude of ways that policy can reduce the cost of college other than debt forgiveness. Purdue University in Indiana has achieved an 11-year freeze on tuition by focusing on efficiency and cutting waste wherever possible across the school. Factors like administrative bloat, consolidating low-enrollment programs, and focusing funds on core research and teaching activities rather than lavish spending on new buildings or other projects are all places for improvement.

While KDOR has said that it won’t treat the student loan bailout as income, it’s a bureaucratic decision from an agency in which decisions are made about interpreting existing statutes. It continues a long-term national and state trend of discretion being extended to the agencies. The question facing Kansans, and their elected leaders, is if the Kansas Legislature will revisit this action in the 2023 legislative session.