Having $10,000 wiped off their loan balance sheet could be helpful to millions of Americans. However, just as with any financial windfall, people may need to worry about taxation.
Having to pay part of the forgiven $10,000 might seem unfair to those who are struggling with the weight of debt.
Previously, the federal government taxed loan forgiveness.
However, a provision of the American Rescue Plan determined that any student loan debt forgiveness between 2021 and 2025 won't be included in one’s federal taxable income.
Forgiven student loans could still trigger state taxes if the state doesn’t conform with federal tax laws. According to CNBC, some borrowers may also owe county levies in addition to state income tax on forgiven debts.
Borrowers seeking loan forgiveness might be relieved by the lack of federal taxes on the forgiven amount, but some states don’t follow federal tax laws. So, be sure to check whether your state will tax your loan forgiveness.
Which states will tax student loan forgiveness?
Recently, the Tax Foundation estimated that 13 states could levy taxes on forgiven student loans. The list has been updated to project a total of seven states that may tax student loan forgiveness.
The Departments of Revenue in Mississippi, North Carolina, and Indiana have all announced that student loan forgiveness will be taxable in those states.
Several states are still on the “possibly” list regarding taxation of loan forgiveness. Arkansas, California, and Wisconsin haven't confirmed whether or not those loans will count as income.
A spokesperson for the Arkansas Department of Finance and Administration said the state legislature’s decisions in January would determine whether to tax forgiven loan amounts.
Massachusetts has been in the conversation, but it hasn’t confirmed a lack of taxation. Democratic State Representative Steve Owens tweeted that the forgiveness wouldn’t be taxable, though the Massachusetts Department of Revenue hasn't confirmed that.
North Carolina Governor Roy Cooper issued a statement urging Republican legislators there to waive state taxes on forgiven loans, saying they should “fix this fundamental unfairness for many hardworking people who will get hit hard by this.”
Here’s how much you might pay in taxes in some states.
Indiana and North Carolina use a flat income tax rate for state taxes, meaning loans forgiven will be taxed at those rates. Indiana has a flat 3.23 percent individual income tax rate and North Carolina has a 4.99 percent individual income tax rate.
Mississippi, another state confirmed to levy taxes on loan forgiveness, uses a graduated rate system ranging from 3 percent to 5 percent.
So, be sure to look into your state's laws before signing up for student loan forgiveness.