Navigating State Taxes on Student Loan Forgiveness: Essential Tips for Students

While federal student loan forgiveness under the American Rescue Plan Act (ARPA) is exempt from federal taxes, some states, including Indiana, Mississippi, North Carolina, and Wisconsin, plan to tax the amount of federal student loan forgiveness. Arkansas is still deciding whether to impose taxes on debt cancellation. Borrowers in these states should prepare for potential taxes and consult with a tax advisor. The forgiven amount will be counted as income, and the tax owed will depend on the individual's tax bracket. Certain loan forgiveness programs, such as Public Service Loan Forgiveness and Borrower Defense to Repayment Discharge, may be exempt from state taxes. ARPA's exemption from federal taxes on student loan cancellation expires at the end of 2025, potentially leading to the resumption of federal and state taxes on loan forgiveness unless exemptions are extended or tax laws change.