Now that President Biden has announced student loan relief, the state tax treatment of forgiven loans is of interest to many borrowers. Taxpayers who have student loans forgiven are spared a federal tax bill, but not all states treat forgiven loans the same.
What is the federal treatment of forgiven student loans?
A forgiven loan amount is counted as income under the Internal Revenue Code. Up until the passage of the American Rescue Plan Act (ARPA) this applied to student loans as well.
With the adoption of the ARPA, an individual can exclude from income certain student loans cancelled or discharged after 2020 and before 2026.
Specifically, exclusions apply if the loan:
- is discharged in 2018, 2019, or 2020 due to a student’s death or total permanent disability;
- is discharged in 2021 through 2025 for any reason;
- is cancelled or discharged in any tax year if the student works for a specified period in certain professions for a broad class of employers; or
- if the student receives repayments of forgiveness of student loans as a participant in certain public health programs or due to certain school closures.
How do states treat forgiven student loans?
Many states follow the federal tax treatment of forgiven student loans. However, some states count the forgiven amounts as taxable income.
In which states might students incur a tax bill?
The following states do not currently follow the federal tax treatment of forgiven student loans.
Arkansas may tax the forgiven loans.
States that will tax the forgiven loan amounts because they do not use federal income as a starting point, have not updated conformity to the ARPA loan forgiveness provisions or have decided not to conform include:
- Indiana
- Minnesota
- Mississippi
- North Carolina
- Wisconsin
Which states are not taxing the forgiven loans?
States that have conformed to the federal treatment, do not tax forgiven loans, or announced that they are not taxing the forgiven student loans, include:
- Alabama
- Arizona
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Georgia
- Hawaii
- Idaho
- Illinois
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Missouri
- Montana
- Nebraska
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- Utah
- Virginia
- Vermont
- West Virginia
States that do not tax income, or that have a limited tax, include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
