Earlier this year, President Biden announced a new student loan forgiveness plan that could impact millions of Americans struggling to pay off their student loans. Eligible recipients may have up to $20,000 canceled from their student loan debt, saving them thousands in interest and potentially completely absolving their student loan debt.
However, a few states where residents who receive this forgiveness may face a higher tax bill. So before you apply for student loan forgiveness, consolidate your outstanding debt with personal loans for students, or another financial move, here’s what you need to know.
Why would a state tax student loan forgiveness?
The intricacies of tax law are complex, even for experts, so it’s understandable you may have questions about why a state would tax this forgiveness. The question most analysts are wondering is if a state considers the absolvement of debt as a source of income.
The federal government has already explicitly stated that the forgiveness would be exempt from federal income taxes thanks to the American Rescue Plan. Most states in the union have announced they’ll follow suit and exempt the forgiveness. Others don’t have income taxes, so they wouldn’t have cause to consider forgiveness an income source.
However, a few states have already announced they plan to see the canceled debt as taxable income.
The states that will consider student loan forgiveness as taxable income
- Mississippi – Mississippi’s Department of Revenue confirmed to multiple news sources that it would tax forgiven student loans.
- Minnesota – Minnesota’s Department of Revenue has updated its website to state student loans forgiven by President Biden’s order, but other forms of student loan relief may still be exempt.
- Wisconsin – Wisconsin’s Department of Revenue confirmed to news sources that due to its current tax laws, it’s required to consider forgiven student loans as taxable income and does not have the authority to change the tax law. Their upcoming budget request session with lawmakers will happen in the fall of 2022 but will only be for the 2023 – 2025 calendar years.
The states that have not yet confirmed whether or not student loan forgiveness will be taxed as income
There are still two outlying states which have not specified whether they’ll consider canceled student loan debt as income:
- North Carolina
How much you could owe if you live in these states and receive $10,000 in canceled student loan debt
- Arkansas – $490
- Minnesota – $680 – $985
- Mississippi – $500
- North Carolina – $499
- Wisconsin – $530 – $765
What to do if you’re planning to take advantage of student loan forgiveness and live in one of these states
First, don’t panic. The amount of taxes you’ll need to pay will most likely be a one-time amount of around $500. Second, understand that there may still be hope as President Biden’s student loan debt relief program is unprecedented. Lawmakers need to amend the tax code to make it possible for the forgiveness to be exempt. Reach out to your state legislators to let them know your concerns. 2022 is an election year for many state and federal representatives, so it’s important to get involved early and ask them whether they’ll support tax exemption to help their constituents.
If you’re still worried about the taxes you’ll owe, reach out to your accountant or tax specialist, who can help you navigate these waters and minimize any potential penalties.
The bottom line
There is no one answer regarding how student loan forgiveness will be handled, as each state has its own tax laws that need to be considered. However, by learning about your state’s tax laws and reaching out to your representative, you can minimize the taxes you’ll need to pay and ensure you have all the information you need to stay compliant with your income tax filings.