3.5 million student-loan borrowers in California will get $1.3 billion in relief because the state won't tax Biden's debt cancellation, Gavin Newsom says

• California Gov. Gavin Newsom asked the state to prep early to waive state taxes on student-debt relief.
• He estimated the move would save 3.5 million Californians $1.3 billion.

California's governor wants to make sure the state is ready to account for President Joe Biden's student-loan forgiveness without any additional tax burdens.

On Saturday, Gov. Gavin Newsom called for the state legislature to take "early action" to ensure Biden's up to $20,000 in debt cancellation will not be subject to any state taxes in California, which has nearly 3,550,000 eligible borrowers. 2.3 million are Pell Grant recipients and would qualify for the full $20,000 in relief.

As Insider previously reported, while the debt relief is not subject to any federal income taxes, state policies are more complicated because they have their separate tax codes, and lawmakers would have to take action to ensure the loan forgiveness would not be taxed on a state level.

"Californians who get student debt relief shouldn't be hit with taxes for it. This will provide up to $1.3 billion in tax relief for more than 3.5 million Californians," Newsom said in a statement. "I look forward to working closely with the legislature to get this done through early action."

States like Mississippi and Indiana have already confirmed the debt relief would be taxable, while others like California will just need to update the tax code to account for the relief.

As Biden said last week, over 26 million borrowers have already applied for debt cancellation through the online form at studentaid.gov, and the Education Department approved 16 million of them so far to have their loans discharged. But the relief is currently on pause due to a decision from the 8th Circuit Court of Appeals, in response to a lawsuit filed by six Republican-led states who argued the relief would hurt their states' tax revenues. During this time, the department cannot actually cancel any borrowers' debt, but Education Secretary Miguel Cardona wrote on Twitter over the weekend that loan companies are "ready to apply" the relief once the court makes a decision.

"We believe strongly that the lawsuits are entirely meritless, and that the debt relief plan is lawful and necessary," Cardona said.

While other conservative lawsuits are still in the mix — the Supreme Court recently dismissed two of them — the 8th Circuit case remains the most pressing one that could determine the fate of Biden's one-time student debt cancellation plan. The Education Department recommends borrowers continue applying for the relief and prepare to resume payments in January 2023, when those with remaining balances will soon be able to make use of a new income-driven repayment plan that is intended to lower monthly payments for enrolled borrowers.