You Could Get Taxed On Forgiven Student Loans If You Live In One Of These 13 States

After months of delay, President Joe Biden officially announced on August 24, 2022 that he would cancel $10,000 in student loan debt per borrower for those who make under $125,000 a year (as single filers, or $250,000 for joint filers) and $20,000 in student loan debt per borrower who received a Pell Grant. He also announced a number of major revisions to the Public Service Loan Forgiveness program and Income Driven Repayment programs that will pay dividends for years to come.

And, luckily, for most Americans, that loan forgiveness will be tax-exempt — unless you live in one of 13 states.

Why Is Student Loan Forgiveness Tax-Exempt For Most Americans?

Typically, forgiven debt is considered taxable income by the federal tax code. But because of Senator Chuck Schumer’s maneuvering with the American Rescue Plan, student loan debt got a carve-out.

In March 2021, Senator Chuck Schumer added a provision to the American Rescue Plan that ensures borrowers who get debt forgiven will not receive a surprise income tax penalty in the eventuality that some or all of student loan debt would be forgiven. That tax exemption lasts until 2025 and means that student loan forgiveness is tax-free until then.

But even though the federal tax code will exempt student loan forgiveness, that forgiveness may still trigger a state tax bill, depending on where you live.

Jared Walczak, the vice president of state projects for the Center for State Tax Policy, shared on August 25 “that 13 states have the potential to tax discharged student loan debt,” because loan forgiveness is considered “equivalent to income” and therefore could be taxable.

Not every state follows the federal government when it comes to tax code — and for people who live in the 13 states that don’t follow the federal plan, they might get a tax bill they don’t like.

How much individuals would owe in taxes varies from state to state. Walczak calculated the average amount someone would have to pay in income taxes based on $10,000 in forgiveness. The bill ranges from $307 to $1,100 depending on where you live. (And, per Bloomberg, Pell Grant recipients could be taxed double the amount because they can get double the debt forgiveness.)

Here’s a breakdown of the 13 states and how much income tax on loan forgiveness may cost:

• Arkansas: $550
• Hawaii: $1,100
• Idaho: $600
• Kentucky: $500
• Massachusetts: $500
• Minnesota: $985
• Mississippi: $500
• New York: $685
• Pennsylvania: $307
• South Carolina: $700
• Virginia: $575
• West Virginia: $650
• Wisconsin: $530

There is still time for states to change how they will handle how their tax code operates when it comes to student loan forgiveness, so it’s possible that not all of these states will hand down bills to their residents.

“This is not a niche issue that only affects a few people,” Walczak said. “It affects a very large number of people, and hopefully, there will be clarity provided on it.”

—

Update: As of Sept. 7, three states have announced student debt forgiveness will be subjected to taxation, and eight other states could follow. However, six states have confirmed student loan forgiveness will be exempt from state tax provisions.