Will Borrowers Have to Pay State Income Tax on Forgiven Student Loans?
Taxpayers who have student loans forgiven are now spared a federal tax bill, but not all states treat forgiven loans the same. As the discussion of a wider student loan forgiveness program continues, the state tax treatment of forgiven loans is of interest to many borrowers.
Federal Treatment of Forgiven Student Loans
A forgiven loan amount is counted as income under the Internal Revenue Code. Up until the passage of the American Rescue Plan Act (ARPA) this applied to student loans as well.
With the adoption of the ARPA, an individual can exclude from income certain student loans cancelled or discharged after 2020 and before 2026.
Specifically, exclusions apply if the loan:
- is discharged in 2018, 2019, or 2020 due to a student’s death or total permanent disability;
- is discharged in 2021 through 2025 for any reason;
- is cancelled or discharged in any tax year if the student works for a specified period in certain professions for a broad class of employers; or
- if the student receives repayments of forgiveness of student loans as a participant in certain public health programs or due to certain school closures.
How States Treat Forgiven Student Loans
Many states follow the federal tax treatment of forgiven student loans. However, not all states will automatically exclude these amounts from taxable income.
In Which States Might Students Incur a Tax Bill?
The following states do not currently follow the federal tax treatment of forgiven student loans. In these states, the amount of the forgiven loan could be included in the income of the taxpayer.
The three states below do not use federal income as a starting point and have not provided further guidance on the treatment of forgiven loans:
These states would need to act or supply clarification that the forgiven amounts are excluded.
Pennsylvania has said that student loans forgiven when a student works for a time in a specific profession will not be taxed. Specifically, loans forgiven through the Public Service Loan Forgiveness Program and the Pennsylvania Student Loan Relief for Nurses Program. Other forgiven student loans are taxable.
New York requires an addition for some student loan amounts forgiven under the ARPA.
Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, South Carolina, Virginia, West Virginia, and Wisconsin have yet to update conformity to include the ARPA. These states usually update conformity but until they do a forgiven student loan amount may be taxable.
Which States Follow the Federal Treatment?
States that mirror the federal treatment of forgiven loans, include:
- District of Columbia;
- New Mexico;
- North Dakota;
- Rhode Island;
- Utah; and
States that have conformed to the student loan forgiveness provisions of ARPA include:
- Maine; and
- North Carolina.
States that do not tax income, or that have a limited tax, include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.