People in line to benefit from President Biden’s plan to cancel up to $20,000 in student loans could be taxed on the one-time relief depending on where they live.
Most other states are taking their cue from the federal government. Through January 2026, the Internal Revenue Service will not count discharged student debt as taxable income. The temporary reprieve stems from the $1.9 trillion stimulus package Biden signed into law last year.
In the days following Biden’s debt relief announcement, at least 10 states — including Virginia, New York and Pennsylvania — assured residents with education loans that discharged debt will not be taxed.
The disparities in states’ treatment of student debt relief are rooted in what is known as Internal Revenue Code conformity — the degree to which a state’s tax code matches the federal one. Some states conform to the entire federal tax code, while others adopt portions as they see fit.
Tax agencies in a number of states can make changes on their own. But in others, the legislature must act, said Eileen Sherr, director for tax policy and advocacy at the American Institute of Certified Public Accountants.
Minnesota Gov. Tim Walz (D) had proposed conforming to the federal treatment of discharged student debt, but the bill did not pass before the end of the legislative session in May. State lawmakers have expressed interest in revisiting the legislation, but unless there is a special session, it will have to wait until the body returns in January.
Similarly, Wisconsin residents who benefit from the one-time student loan relief will have to pay taxes on the canceled debt unless the legislature updates the policy, according to the Wisconsin Department of Revenue. The agency said lawmakers could take up the issue when they are back in session in January.
The same is true in Arkansas, where tax officials say they are also awaiting legislative action.
“The states could easily enact legislation, either way, to say they are going to exempt it or they’re going to tax it, so it’s definitely up in the air,” Sherr said.
West Virginia wants official guidance from the IRS about whether to treat the debt as income, according to a spokesperson for the state’s tax division who noted that the federal agency has yet to confirm that Biden’s cancellation plan lines up with other forgiveness programs excluded from income under the stimulus provision.
Meanwhile, California’s Franchise Tax Board said it needs to know what authority the federal government will use to cancel education debt under the new plan. If the debt is forgiven in the same way the Education Department discharges outstanding balances on income-driven repayment plans, then Californians would not face state taxes.
The federal department said it will share more information in the coming weeks.
Some states that have confirmed their plans to tax federal debt relief provided estimates of how much residents could pay.
The revenue department for Indiana, which has a state tax rate of 3.23 percent, estimates that residents will pay up to $323 for $10,000 in student loan forgiveness and up to $646 for $20,000. Hoosiers also will pay additional county tax, which varies by municipality.
For many borrowers, the amount they save through loan cancellation will exceed the state taxes they may have to pay. The Education Department has advised borrowers to consult a tax professional.