Millions of Americans may not have to pay federal student loans anymore. But if you live in a state that has decided to tax forgiveness, you should prepare, experts say.
Even though the Supreme Court struck down President Joe Biden’s broad student-debt cancellation plan, borrowers who were defrauded or misled by their colleges or had their payment counts adjusted had those debts forgiven. All those people are exempt from federal taxes on their forgiveness under the American Rescue Plan Act (ARPA).
Most states followed suit and didn’t impose taxes on student loan cancellations. But in the handful that do plan to tax forgiveness, borrowers should get ready so they’re not surprised this tax season or worse, face an audit.
Which states will tax student debt forgiveness?
Indiana, Mississippi, North Carolina and Wisconsin will tax the amount of your federal student loan forgiveness.
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Another state, Arkansas, is still deciding whether it will impose taxes on debt cancellation, said Garrett Watson, senior policy analyst at nonpartisan tax policy think tank Tax Foundation. “Arkansas will probably decide this year,” Watson said. “By fall, I imagine.”
The last time Arkansas commented on its plans to tax student debt cancellation was in September 2022. At the time, it said it would levy a tax. But its General Assembly could change that plan.
“I suggest folks in those states, well in advance of the end of the year, connect with a tax…
