Some states could tax student loan forgiveness as income

President Joe Biden announced that he’s forgiving $10,000 to $20,000 in student loan debt for individuals who make less than $125,000 a year and couples making less than $250,000. Because of a provision in the American Rescue Plan, the debt relief will not be considered taxable income at the federal level.

According to analysis from the Tax Foundation, “The American Rescue Plan Act of 2021 temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025 under the rationale that tax burden arising from treating forgiven student debt as income partially undermines debt relief.”

But what about state income tax? 

New analysis from the Tax Foundation shows borrowers in 13 states could be charged. Hawaii has the highest maximum likely tax liability of $1,100 and Pennsylvania has the lowest at about $300. The other states including Kentucky, Arkansas, Idaho and Massachusetts, mostly range between $500 and $600.

“In the coming weeks and months, we are likely to see states issue guidance on the treatment of discharged student loan debt,” Jared Walczak, vice president of state projects at the Tax Foundation, said in a statement. “States which follow the federal treatment here will likewise exclude debt forgiveness from their own state income tax bases. But, for a variety of reasons, not every state does that.”

This isn’t a done deal. These states could align themselves with the federal government and not consider the forgiven debt taxable income. To do that, they’d either need to pass legislation or make the change administratively. Most states do align with the federal government and nine states don’t have state income tax, so residents in those states won’t have to worry.