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These 5 States May Tax Your Student Loan Forgiveness

- Money; Getty Images
Money; Getty Images

Student loan borrowers in a handful of states could wind up having to pay hundreds of dollars in taxes on student debt forgiven under President Joe Biden's new plan.

Student loan forgiveness is exempt from federal income taxes, thanks to a clause in last year's American Rescue Plan. Most states either follow that new federal rule or don't have an income tax.

But several states' tax codes do count canceled student loans as income, according to an updated analysis from the Tax Foundation. For some borrowers, that could hike their state tax bills by up to $985 for $10,000 of forgiven loans — and ostensibly more for those borrowers who received Pell Grants and are eligible for $20,000 worth of forgiveness.

Five states are currently on track to tax student debt forgiveness, says Jared Walczak, vice president of state projects for the Tax Foundation. Those states are Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin.

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Mississippi’s Department of Revenue confirmed to Bloomberg Tuesday that it will tax forgiven student loans. Similarly, Minnesota’s Department of Revenue updated its website Friday to say that it will also be taxing discharged student debt specifically through Biden’s widespread relief plan — though other forms of student debt relief may be excluded.

In a statement to Money, Wisconsin's Department of Revenue says student debt forgiveness would be taxed under current tax code, and the department does not have the authority to change it alone. Instead, it would require action from lawmakers.

For now, the department says it plans to address the issue in an upcoming biennial budget request this fall, which is for the years 2023 to 2025.

"The legislature could take it up before then when they are back in session, which, as I understand it, won't be until January," Patty Mayers, spokesperson for the department, said in an email to Money. (A Tuesday report from Wisconsin's Journal Sentinel suggests some state lawmakers may be opposed to changing the rule via legislation.)

Arkansas and North Carolina — the two remaining states — have not publicly stated whether canceled student loans under Biden’s plan will be taxable, but they do not have clear rules that would exclude student debt forgiveness from taxable income. Like Wisconsin, those states may have to pass legislation to exempt loan forgiveness from taxes. (This could also happen in Mississippi and Minnesota.)

Walczak shared an updated estimation of how much taxpayers could owe in the various states, assuming $10,000 of forgiveness:

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The revenue departments of Arkansas and North Carolina did not respond to Money's request for clarity. However, Arkansas' Department of Financial Services told Bloomberg that the agency is reviewing the matter.

The Tax Foundation first published a widely cited analysis Friday that found 13 states have the potential to tax discharged student loans, but the organization updated the list on Tuesday and Wednesday with a smaller list of states. Walczak says the initial analysis was based on outdated tax code information.

“Since original publication, a number of states have indicated that they will address this administratively or believe they have flexibility of interpretation under existing law,” he added in an email to Money.

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This article was updated on Aug. 31 to include a statement from Wisconsin's Department of Revenue.

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Everything You Need to Know About Biden's Student Loan Forgiveness Plan

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