Tax Byte

Generally, the discharge of indebtedness is considered taxable income, which includes student loans, though some exceptions do apply. Most notably, under section 9675 of the American Rescue Plan Act (ARPA) of 2021, student loan forgiveness under income-driven repayment (IDR) plans is temporarily exempted from taxable income if forgiven between 2021 through 2025. Additionally, under the 2017 law known as the Tax Cuts and Jobs Act, student loan forgiveness under the Total and Permanent Disability (TPD) program is also temporarily exempt from taxation through 2025.

And as the Biden administration generally noted in its August 24 release, “[t]hanks to the American Rescue Plan, this debt relief will not be treated as taxable income for federal income tax purposes.”

While it appears most student loan forgiveness resulting from the Biden administration’s plan will not qualify as taxable income at the federal level, it might not be as cut and dried for some states.

For states that conform to the federal tax treatment of student loan forgiveness, there may be no cause for concern. It appears the jury is still out, however, for 13 states that could determine this student loan debt forgiveness to be subject to state income tax, according to Jared Walczak, vice president of state projects at the Tax Foundation.

The table below is a useful snapshot of where and how the $10,000 of forgiven student loan debt may be taxed at the state level (amounts doubled for Pell Grant recipients).