States That Could Tax Student Loan Forgiveness

President Biden’s original student loan debt forgiveness plan was put on hold due to legal challenges. But ever since the U.S. Supreme Court struck down that plan, the Biden administration found other ways to forgive billions of dollars in student loan debt.

But another important tax question persists for those who've had their debt forgiven: will you have to pay state taxes on your forgiven student loan debt?

The answer to whether you will owe state taxes because of student loan forgiveness depends on where you live. That’s because some states' laws regarding the tax treatment of forgiven debt do not conform to the federal government’s current stance on student loan relief.

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As a result, it’s important to have information about those states and to know what state tax liability for student loan relief could mean for you.

Is student loan forgiveness taxable?

To understand whether student loan forgiveness will trigger an unexpected state tax bill, it helps to know why certain student loan forgiveness isn’t taxable at the federal level.

During the COVID-19 pandemic, the American Rescue Plan Act (ARPA) became law, and effectively made student loan forgiveness nontaxable, for federal income tax purposes, through 2025.

That’s a change from the general rule that you may have known from the past — i.e., that the IRS typically considers forgiven debt to be taxable for federal income tax purposes.

Also, when the Biden administration first announced student loan forgiveness a few years ago, the White House confirmed that student loan relief under the program (which ended up on ice due to court challenges) wouldn't be taxable to you as income on federal tax returns.

Will you pay state taxes on your forgiven student loan?

While you won’t likely be taxed at the federal level for student loan debt cancellation, some states could or will tax the amount of student loan forgiveness you receive.

Those states include Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.

The reason why some of these states might consider forgiven student loan debt to be taxable income has to do with a concept called conformity.

Basically, when the federal government enacts laws — in this case, laws that impact the Internal Revenue Code — many states readily conform relevant statutes, rules, and regulations to the new federal tax treatment.

Some of these states could still pass legislation to conform the the federal stance.

So, what does that mean for you? Data show that tax liability for student loan forgiveness in various states could range from a little over $500 to as much as $1,100.

So, if you live in Mississippi, for example, the maximum amount of state tax liability based estimates would be around $500. (That calculation assumed that you are eligible for $10,000 of loan forgiveness.)

Using Mississippi again, $20,000 of student loan forgiveness could result in $1,000 of state tax liability.

While this doesn’t seem like good news, it should be noted that some of the states could find a legislative way to exclude student loan forgiveness from taxable income.

What should you do?

At this point, you can stay tuned to information on the status of student loan forgiveness.

And if you live in one of the nine states with no income taxes, you don’t have to worry about student loan forgiveness (if the program is allowed to go forward) being treated as income on your state tax return.

However, if you live in one of the states that could or will tax student loan forgiveness and the forgiveness program ends up moving forward, you will want to stay tuned to any guidance or information that is made available on the issue.

For example, in the past, the Department of Education said that some borrowers could opt out of student loan debt relief. That and other guidance, which could change, could help you know how student loan debt relief (if you get it) will affect your state taxable income — or your next tax bill.

Related

• Will You Pay Taxes on Your Recently Forgiven Student Loan
• Who Qualifies for Student Loan Forgiveness?
• A Little-Known Tax-Free Way to Help Pay Your Student Loan
• Types of Income the IRS Doesn't Tax