Alice Morgan Photo Illustration by Investopedia
TAKEAWAYS KEY
- You may be required to pay state taxes on the federal loan forgiveness that you receive if you reside in Arkansas, Indiana or Mississippi.
- The American Rescue Plan Act, or ARPA, exempts federal student loans from taxation.
- Some states, however, have chosen to tax the forgiveness of taxes as state-level income.
You may have to pay income taxes if you reside in a state that has imposed a tax on federal student loans forgiven in 2024.
Joe Biden, who was then president at the time, forgiven billions of dollar in student loans to borrowers all over the nation. Forgiveness of debts generally is treated as taxable income. In 2021 however, the former administration of Joe Biden implemented the American Rescue Plan Act(ARPA), which excluded all federal student loans forgiveness from federal income taxes until 2026.
ARPA was not implemented automatically in some state tax laws when ARPA was first introduced. They had to determine if the forgiveness should be taxed on a state-by-state basis. Five states—Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin—chose to tax that forgiveness, but each has a different policy.
The rules that apply to these five states are listed below.
Arkansas
Arkansas’ tax laws consider student loan forgiveness as taxable income.
“That does include most student loan forgiveness. The exceptions are Public Service Loan Forgiveness and forgiveness for total disability,” Scott Hardin is a spokesperson of the Arkansas Department of Finance and Administration.
Indiana
All federal student loans forgiven in Indiana are taxable, except for those forgiven through PSLF, Teacher Loan Forgiveness and National Health Service Corps. Also, any forgiveness made under the Teacher Loan Forgiveness program, the National Health Service Corps or due to total and permanent disability, bankruptcy or death.
Mississippi
The Mississippi Department of Revenue informed Investopedia via email that it offers loan forgiveness for Mississippi tax debt. The debt cancellation under Coronavirus Aid, Relief, and Economic Security is the exception.
North Carolina
North Carolina law requires that you add back the forgiven student loans to your gross adjusted income. The tax law applies to student loans forgiven unless the loan was canceled due to death, total and permanent disabilities or disability.
The rules for student loans that were forgiven by insolvency are slightly different. They vary depending on the circumstances.
Wisconsin
State taxes are applied to all forgiveness of student loans, except for those that were given via PSLF (Personal Student Loan Forgiveness), death, permanent total disability, the Teacher Loan Repayment Program and National Health Service Corps.
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