7 States That Could Tax Your Student Loan Forgiveness
If the U.S. Supreme Court upholds President Joe Biden’s federal student loan forgiveness plan — an unlikely scenario, according to legal experts — borrowers in some states might have to pay state income taxes on the amount forgiven.
It’s hard to nail down how many states could tax loan forgiveness. After the plan was announced last August, numerous media and tax sites speculated on which states might impose taxes, although there was no consensus on how many.
Forbes recently cited an August 2022 Tax Foundation analysis saying that 13 states have the “potential” to tax forgiven student debt: Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.
But most reports — including the Tax Foundation’s — say that seven states are most likely to tax student loan forgiveness: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.
There’s even uncertainty about that, however. As GOBankingRates reported last November, California Gov. Gavin Newsom announced that Californians receiving federal student loan forgiveness would not have to pay state taxes on the amount that is forgiven under Biden’s plan. Arkansas officials also have denied plans to tax forgiveness.
One reason there isn’t much clarity on state tax implications is that the loan forgiveness program is still up in the air. Until it is given the legal thumbs up, many states are taking a wait-and-see approach.
Here’s a look at the seven states that could impose a tax on cancelled student debt, according to a 2022 report from NBC News.
Arkansas
The Arkansas Department of Finance and Administration said last September that “it would be inaccurate to report student loan forgiveness will be taxable” there because its legislative session was not yet complete, NBC News reported.
The average student loan debt in Arkansas is $34,000, according to the Education Data Initiative.
California
A 2022 calculation by The Los Angeles Times found that a single taxpayer earning the median annual income of about $64,000 in Los Angeles County “could get an $800 tax bill for $10,000 in loan forgiveness, and a roughly $1,600 bill if they have $20,000 in loans canceled,” NBC News reported. However, some California legislators have promised to exempt student debt forgiveness from being taxed.
The average student loan debt in California is $34,000.
Indiana
As of last fall, Indiana announced that it will tax people who accept the debt cancellation. A spokesperson for the Indiana Department of Revenue confirmed to NBC News that its residents will owe up to $323 for $10,000 in student loan forgiveness and $646 for $20,000 in student loan forgiveness.
The average student loan debt in Indiana is $33,000.
Minnesota
As of October 2022, Minnesota had not updated its tax laws to conform with the new federal regulations tied to student debt relief, NBC News reported. At the time, Minnesota news station KMSP-TV estimated that an individual who has $10,000 in loans forgiven would get a state income tax bill of at least $535.
The average student loan debt in Minnesota is $34,000.
Mississippi
Last September, Mississippi Today reported that state residents who were eligible for up to $10,000 in student loan forgiveness could see $500 in additional taxes if they accept loan forgiveness. Those who are eligible for up to $20,000 in debt relief could owe as much as $1,000.
The average student loan debt in Mississippi is $37,000
North Carolina
On Sept. 14, 2022, North Carolina Gov. Roy Cooper called on state lawmakers to waive the tax, saying that “legislative leaders need to find a solution that treats student loan forgiveness the same way they handled the PPP loan forgiveness that many of them received.”
The average student loan debt in North Carolina is $38,000.
Wisconsin
Similar to Minnesota, Wisconsin — as of last fall — had not updated its tax laws to conform with new federal regulations tied to student debt relief.
The average student loan debt in Wisconsin is $32,000.
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