Special Report

8 States That Might Tax Student Debt Forgiveness

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President Joe Biden’s executive order to wipe out some student loan debt raised immediate questions about how states would treat this relief for tax purposes.

The plan forgives up to $10,000 in outstanding federal student loan debt and up to $20,000 for students from low-income families who qualified for a Pell Grant. The White House estimates that 27 million people qualify for $20,000 in relief. Individuals earning more than $125,000 per year are not qualified for debt discharge under this new relief plan.

Some of these fortunate debtors, however, could wind up on the hook for hundreds of dollars in income taxes on the forgiven debt. For example, unless Arkansas implements a legislative fix, anyone there who benefits from this debt forgiveness could pay up to $550 in state income tax and more if they qualify for the additional relief, according to KFSM news.

Discharged student loan debt is typically considered a form of income subject to federal income tax, but the American Rescue Plan Act of March 2021 included a moratorium on taxing student loan debt forgiveness through 2025. This means that student loans discharged under Biden’s plan announced in August will not be taxed at the federal level.

The situation is murkier at the state level. Most states are following the federal government’s lead by not taxing this discharged debt. But Indiana and North Carolina plan to tax this forgiven debt, as does Mississippi, where nearly 11% of federal student loan borrowers are at least 90 days past due on their last payment, the highest percentage in the nation. About 2.7 million federal student loan borrowers live in these states.

The situation remains unclear in five states, including California, where 4 million federal student loan borrowers reside. Legislative leaders in the Golden State have insisted they will act to avoid taxing this forgiven debt, but the situation is not yet settled. About 2.3 million borrowers live in states with situations similar to California’s, waiting in limbo to see what, if anything, they will have to pay in taxes next year. (These are cities where college students are most burdened by debt.)

24/7 Wall St. reviewed the eight states where the student debt forgiveness could be taxed, with information gathered as of Sept. 10. States on this list are ordered by the share of student loan borrowers who are 90+ days past due. (Here are the states with the most past due student debt.)

Data on the number of student loan borrowers by state in 2021; average student loan debt balances by state in 2021; and percentage of student loans borrowers who are 90+ days past due on their loans come from the Federal Reserve Bank of New York. Data on income tax collection and state revenue per capita for 2020 come from the Tax Foundation, a Washington D.C.-based nonprofit tax research organization.

Here is where federal student loan debt forgiveness may be taxed.

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1. California
> Number of student loan borrowers, 2021: 4,008,400
> Percentage of borrowers past due, 2021: 7.0% – 18th highest
> Average student loan debt balance, 2021: $37,700 – 8th highest
> State individual income tax collection per capita, 2020: $2,135 – 4th highest
> State revenue per capita, 2020: $7,989

Like other states where the situation is currently in flux, Californians who have their federal student loan debt forgiven could wind up paying a state income tax on that debt discharge. “Rest assured, one way or another, California will not tax the federal student debt relief,” State Assembly Speaker Anthony Rendon tweeted on Sept. 9, a strong indication that legislative action will be enacted to exempt the canceled loans from state taxation.

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2. Minnesota
> Number of student loan borrowers, 2021: 884,400
> Percentage of borrowers past due, 2021: 5.6% – 28th highest
> Average student loan debt balance, 2021: $32,700 – 30th highest
> State individual income tax collection per capita, 2020: $1,914 – 6th highest
> State revenue per capita, 2020: $8,222

State legislative leaders and Democratic Gov. Tim Walz have said in media interviews that there is broad support for a legislative measure to exempt student loan forgiveness from state income tax in the 2023 legislative session. Unless a decision is made to change the status quo, Minnesotans who receive federal student loan debt forgiveness will have to pay a state income tax on that forgiven debt.

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3. Indiana
> Number of student loan borrowers, 2021: 926,500
> Percentage of borrowers past due, 2021: 9.0% – 9th highest (tied with Arkansas)
> Average student loan debt balance, 2021: $32,900 – 29th highest
> State individual income tax collection per capita, 2020: $1,224 – 19th highest
> State revenue per capita, 2020: $7,175

Indiana is one of three states that, as of Sept. 9, have confirmed their intention to tax federal student loan debt relief. Under current state law, as with most states, residents are required to report forgiven loans as income. The state Department of Revenue told the Associated Press that there will not be any exceptions for debt relief under Biden’s executive order and the American Rescue Plan’s federal income tax moratorium through 2025.

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4. Wisconsin
> Number of student loan borrowers, 2021: 784,500
> Percentage of borrowers past due, 2021: 6.2% – 25th highest
> Average student loan debt balance, 2021: $31,200 – 36th highest
> State individual income tax collection per capita, 2020: $1,445 – 12th highest
> State revenue per capita, 2020: $7,081

Democratic Gov. Tony Evers plans to include a provision in the state budget next year that would eliminate a tax on forgiven student loans, but the move would have to pass the state’s Republican-controlled legislature, according to the Associated Press. So far, the state’s elected Republican lawmakers have been silent on the issue. Until a decision is made in favor of tax exemption, Wisconsinites who receive federal student loan forgiveness will have to pay a state income tax on that gain.

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5. North Carolina
> Number of student loan borrowers, 2021: 1,349,100
> Percentage of borrowers past due, 2021: 8.1% – 13th highest
> Average student loan debt balance, 2021: $37,200 – 10th highest
> State individual income tax collection per capita, 2020: $1,198 – 20th highest
> State revenue per capita, 2020: $5,795

On Aug. 31, the state’s Department of Revenue stated plainly that student loan forgiveness “is currently considered taxable income in North Carolina” and that it is watching the state’s General Assembly for any change to the taxability of this forgiven debt. The assembly’s next legislative session begins in January, after the midterm elections.

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6. Arkansas
> Number of student loan borrowers, 2021: 373,900
> Percentage of borrowers past due, 2021: 9.0% – 9th highest (tied with Indiana)
> Average student loan debt balance, 2021: $32,400 – 33rd highest
> State individual income tax collection per capita, 2020: $968 – 30th highest
> State revenue per capita, 2020: $7,837

Scott Hardin, spokesperson for the Arkansas Department of Finance and Administration, told local CBS affiliate KFSM-TX that his agency will be taking “a hard look at” whether or not to treat forgiven student loan debt as taxable income. Unless the state makes a special provision, anyone who received federal student loan forgiveness would be on the hook for additional state income tax.

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7. West Virginia
> Number of student loan borrowers, 2021: 215,900
> Percentage of borrowers past due, 2021: 10.0% – 2nd highest
> Average student loan debt balance, 2021: $32,500 – 31st highest
> State individual income tax collection per capita, 2020: $1,086 – 26th highest
> State revenue per capita, 2020: $8,294

Officials in the Mountain State have been mum about any changes that would exempt forgiven federal student loan debt from the state’s income tax code. As of Sept. 10, West Virginia remains one of five states that have yet to announce plans to take a reciprocal approach to Biden’s executive order by exempting this forgiven debt from state income tax.

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8. Mississippi
> Number of student loan borrowers, 2021: 417,600
> Percentage of borrowers past due, 2021: 10.8% – The highest
> Average student loan debt balance, 2021: $37,500 – 9th highest
> State individual income tax collection per capita, 2020: $629 – 39th highest
> State revenue per capita, 2020: $7,263

Republican Sen. Josh Harkin, chairman of the state Senate committee in charge of tax issues, told the Associated Press in a report published on Sept. 4 that he is willing to examine the issue of taxing student loan debt forgiveness in the next legislative session. However, according to an Aug. 30 Bloomberg report, Mississippi has decided against the exemption, putting those in the state who receive student loan debt relief on the hook for paying state income tax on that forgiven debt.

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