Many student-loan borrowers who were excited about President Joe Biden’s announcement of debt relief may encounter unexpected state taxes on the relief they receive. The Education Department under Biden’s administration initiated the discharge of student loans for approximately 804,000 borrowers who were on income-driven repayment plans. This move aimed to address the issue of borrowers who had fulfilled the necessary years of qualifying payments but were not granted loan forgiveness due to administrative errors and problems within the student loan system.
The recently passed American Rescue Plan includes a provision that excludes loan forgiveness from being considered gross income for federal taxes between 2021 and 2025. However, individual states possess the authority to determine their own tax laws aligned with federal regulations, leading to discrepancies across different states. While most states have chosen not to tax debt relief, a few have made the decision to do so.
The following states have confirmed their intention to tax the debt relief provided by Biden’s student-loan plan: Mississippi, North Carolina, Indiana, Wisconsin, and Arkansas. Although Arkansas initially indicated that forgiven debts would be taxed as income, there is a possibility that the state legislature might reconsider this stance.
According to the Tax Foundation, a tax policy think tank, student loan forgiveness is generally considered taxable income, although the current tax code includes a complex array of exceptions. Beneficiaries of Public Service Loan Forgiveness and individuals whose schools have closed down are among those exempt from taxes. The Tax Foundation stressed the importance of consistent and widely applicable rules for the tax treatment of forgiven loans in order to promote simplicity and neutrality.