Ibrahim Gardner
The Biden administration's plan for broad-based student loan forgiveness of up to $20,000 per individual has spared borrowers from federal tax bills, but some states still treat forgiven loans as taxable income. While many states follow federal tax treatment, others have their own rules. This means that whether or not a forgiven loan amount is taxed depends on the state's specific policies and definitions of taxable income. As of 2025, five states—Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin—have chosen to tax student loan forgiveness, with each state implementing different policies.
| Characteristics | Values |
|---|---|
| States that will tax student loan forgiveness | Arkansas, Indiana, Mississippi, North Carolina, Wisconsin |
| States that won't tax student loan forgiveness | Alaska, Florida, Minnesota, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming |
| States that are reviewing their tax rules | 3 states |
| States that conform to pre-ARPA tax laws | California, Massachusetts, Michigan, Wyoming |
| States that don't use federal taxable income or AGI | Arkansas, New Jersey, Mississippi, Pennsylvania |
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What You'll Learn
Federal tax exemption for student loan forgiveness
The American Rescue Plan Act (ARPA) of 2021 exempted student loan forgiveness under income-driven repayment (IDR) plans from federal taxation through 2025. This means that borrowers working toward loan forgiveness have been exempt from federal taxes since 2021, and this exemption will last until the end of 2025. This exemption was created to prevent beneficiaries from getting hit by a large unexpected tax bill, as a tax burden arising from treating forgiven student debt as income undermines debt relief.
While federal taxes do not impose taxes on student loan forgiveness, some states do. This is because the way federal forgiveness is structured means that the majority of benefits will flow to people in the bottom 60% of the income distribution. As such, a $20,000 increase in income could translate into a steep tax bill.
As of 2023, Indiana, North Carolina, and Mississippi treat forgiven student loans as taxable income. Minnesota and Wisconsin use an older definition of federal AGI and must update their conformity date if they want to exempt student debt forgiveness. Other states that conform to pre-ARPA tax laws include California, Massachusetts, Michigan, and Wyoming. There are also some states that don't use federal taxable income or AGI, including Arkansas, New Jersey, Mississippi, and Pennsylvania.
Some states have chosen not to tax forgiven student loans. These include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Minnesota has also recently eliminated student loan forgiveness tax.
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State tax treatment of forgiven loans
The state tax treatment of forgiven loans varies across the United States. While taxpayers who have their student loans forgiven are spared a federal tax bill, some states may treat the forgiven loan amount as taxable income. This is because a forgiven loan amount is generally counted as income under the Internal Revenue Code.
The American Rescue Plan Act (ARPA) of 2021 exempted student loan forgiveness under IDR plans from federal taxation through 2025. This means that certain student loans cancelled or discharged after 2020 and before 2026 can be excluded from income. However, this is dependent on the state's conformity with federal tax laws. States that use the current definition of federal AGI or "rolling conformity" do not tax forgiven student loans under their state income taxes. On the other hand, states that conform to federal rules as defined before March 2021 or "static conformity" treat forgiven student loan debt as taxable income.
As of 2022, four states plan to treat forgiven student loans as income, while three states are reviewing their tax rules. States that do not currently follow the federal tax treatment of forgiven student loans and may tax the forgiven amounts include Arkansas, California, and Wisconsin. Minnesota and Wisconsin use an older definition of federal AGI and must update their conformity date if they want to exempt student debt forgiveness. Other states that conform to pre-ARPA tax laws include California, Massachusetts, Michigan, and Wyoming. States that do not use federal taxable income or AGI to determine state income taxes include Arkansas, New Jersey, Mississippi, and Pennsylvania.
It is important to note that the state tax treatment of forgiven loans is a complex issue, and the information provided here may not be exhaustive or up-to-date. For specific information on how a particular state treats forgiven loans for tax purposes, it is recommended to consult official state sources or seek professional tax advice.
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State income tax on federal student loan forgiveness
The American Rescue Plan Act (ARPA) of 2021 exempted student loan forgiveness from federal taxation through 2025. However, this does not apply to state taxes, and some states have decided to treat student loan forgiveness as taxable income.
Most states with an income tax (34) will not tax forgiven student loans because they "conform" with federal definitions of income. However, there are some states that do not conform to the current federal tax laws and will treat forgiven student loans as taxable income. These states include Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin.
Some states, such as Pennsylvania, have existing state laws that exempt narrow forms of student loan forgiveness from state tax. Other states, like Minnesota, have chosen not to tax forgiven student loans.
It is important to note that the tax treatment of forgiven student loans can vary from state to state, and some states have yet to announce their final decision. Therefore, it is advisable for borrowers to contact their loan servicers and seek specific information regarding their state's tax laws.
Additionally, there are ways to reduce taxable income levels, such as deducting interest paid on private student loans or refinancing private student loans to lower interest rates.
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State tax laws and the American Rescue Plan Act (ARPA)
The American Rescue Plan Act (ARPA) of 2021 provides additional relief to individuals impacted by the COVID-19 pandemic. It includes provisions related to individual taxpayers, such as additional economic impact payments and recovery rebate credits. It also allows taxpayers from Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands to qualify for the EITC.
ARPA also makes changes to the Affordable Care Act's premium tax credit (PTC), with the goal of making healthcare more affordable for 2020, 2021, and 2022. These changes will result in significant savings for taxpayers purchasing healthcare on the Marketplace. The ARPA removes the income ceiling, allowing more taxpayers to qualify for a premium tax credit, regardless of income.
ARPA has implications for student loan forgiveness and state taxes. While forgiven debt is usually treated as income, ARPA explicitly exempted student debt forgiven between 2021 and 2025. However, not all states conform to federal tax laws. If a state uses the current definition of federal AGI ("rolling conformity"), forgiven student loans are not taxable under state income taxes. However, if a state conforms to federal rules defined before March 2021 ("static conformity"), forgiven student loan debt will be treated as taxable income.
Some states that conform to pre-ARPA tax laws include California, Massachusetts, Michigan, and Wyoming. States that do not use federal taxable income or AGI include Arkansas, New Jersey, Mississippi, and Pennsylvania. It's important to note that state tax laws regarding student loan forgiveness may change, and borrowers should refer to their specific state's tax regulations.
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Reducing taxable income
Student loan forgiveness can be a huge relief, but it's important to understand the potential tax implications to avoid what's known as a "student loan tax bomb". The good news is that, at the federal level, the American Rescue Plan Act (ARPA) of 2021 has temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025. This means that any student loan discharged between 2021 and 2025 is exempt from federal income taxes. However, it's important to note that this exemption only applies if your loan was forgiven due to specific circumstances, such as the death or permanent disability of the student, participation in certain public health programs, or school closures.
The impact of student loan forgiveness on your state taxes is a more complex issue and varies depending on the state you live in. While many states follow the federal tax treatment and do not tax forgiven student loans, some states count the forgiven amounts as taxable income. As of now, it appears that Arkansas, California, Mississippi, and Wisconsin are among the states that may tax forgiven student loans. On the other hand, Minnesota, Pennsylvania, and Wyoming have indicated that they will not tax student loan forgiveness.
To reduce the potential impact of taxable income from student loan forgiveness, it's essential to understand the specific rules and regulations of your state. Here are some strategies that may help:
- Review your state's tax treatment of forgiven student loans: Stay up to date with your state's tax laws and any changes or clarifications they may announce regarding student loan forgiveness.
- Participate in qualifying federal loan programs: If you meet the eligibility criteria and follow the rules of programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness, any loan forgiveness you receive is likely to be tax-exempt.
- Consider income-driven repayment plans: If you repay your loans under an income-driven repayment plan, you may qualify for loan forgiveness after a certain number of payments, which is typically tax-exempt.
- Seek professional advice: Consult a tax professional or financial advisor who can provide personalized guidance based on your specific circumstances and state of residence.
By being proactive and informed about the tax implications of student loan forgiveness, you can minimize the potential impact on your taxable income and maximize the benefit of having your student loans forgiven.
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Frequently asked questions
California does not currently conform to the federal tax treatment of forgiven student loans. This means that forgiven student loans may be counted as taxable income.
New York does not tax forgiven student loans.
Yes, North Carolina levies state taxes on federal student loan forgiveness.
Yes, Indiana taxes forgiven student loans. However, there are some exceptions, including for loans forgiven under PSLF, Teacher Loan Forgiveness, National Health Service Corps, and in the case of total and permanent disabilities, bankruptcy, or the death of a student.
No, Florida does not tax income.
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