When federal student loans were forgiven in 2024, many recipients found themselves in an unexpected tax situation. While the American Rescue Plan Act (ARPA) of 2021 exempted federal student loan forgiveness from federal income tax until 2026, several states opted to treat this forgiven debt as taxable income. This divergence in tax policy means that borrowers in certain states face state-level tax liabilities on their federal student loan forgiveness.
Specifically, five states—Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin—decided to tax federal student loan forgiveness as income. However, each state has unique regulations and exemptions. For instance, Arkansas and Indiana generally tax most student loan forgiveness, with exceptions for Public Service Loan Forgiveness (PSLF) and forgiveness due to total disability. Mississippi taxes loan forgiveness but exempts debt canceled under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. North Carolina requires the addition of forgiven amounts back into taxable income, unless the loans were canceled due to death, total and permanent disability, or specific insolvency rules. Similarly, Wisconsin taxes all student loan forgiveness unless it falls under PSLF, death, total and permanent disability, the Teacher Loan Forgiveness program, or the National Health Service Corps Loan Repayment program.
The varying state tax treatments highlight the importance for borrowers to understand their specific state's laws regarding student loan forgiveness. This ensures compliance and helps avoid unexpected tax burdens, emphasizing the need for clarity in financial planning. Even with federal relief, state-level regulations can significantly impact the financial outcome for those who received student loan forgiveness.