Student Loan Forgiveness & Taxes

With the recent student loan forgiveness announcement, many borrowers have been left confused or even unaware of their tax obligation for the coming tax year. Help your clients know what to expect with our list of common tax-related questions surrounding student debt relief.

Is student debt forgiveness taxable?

For the most part, no. The American Rescue Plan of 2021 made student debt forgiveness non-taxable for federal income tax until 2025. However, this does not take into account state income tax.

Is student debt forgiveness taxable under my state taxing authority?

It depends. Most states will follow the federal government and not count student debt forgiveness as taxable income. But there are a handful of states where this decision is yet to be made.

As of November 2022, North Carolina, Indiana, and Mississippi have legislation in place that taxes student debt relief. Arkansas, Minnesota, Wisconsin, and California have yet to announce a decision.

How will the state taxing authority know who’s received student debt relief?

Because the federal government has decided to not tax student deft relief, they will not be sending out 1099-C forms to borrowers and state taxing authorities. This will put the burden on borrowers to be proactive and pay any state income tax owed.

As a result, it’s likely many borrowers will not know they need to pay state income tax on their debt relief without the 1099-C form alerting them of this obligation. Unfortunately this opens up the door for state tax notices and audits down the road.