Special Report

8 States That Might Tax Student Debt Forgiveness

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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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