8 States That Might Tax Student Debt Forgiveness

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.

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.

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.

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.

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.