President Biden’s administration has been successful in forgiving student loan debt for over 5 million borrowers, despite the recent legal roadblocks the Saving on a Valuable Education repayment plan and the “Plan B” debt relief proposal have faced.
The fate of student loan forgiveness remains unclear — especially under a Trump presidency. But if your student loan debt was wiped out last year, you might be on the hook for paying taxes on your forgiven debt.
Here’s everything you need to know about how student loans can affect your tax return.
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Will I have to pay taxes if my student loan debt is forgiven?
It depends on where you live.
Education debt relief is typically taxed as income, so any loan amount that’s forgiven is added to your adjusted gross income: If you make $50,000 and have $20,000 in loans erased, your adjusted income that year is $70,000. However, thanks to a provision tucked into the American Rescue Plan, federal taxes on student debt forgiveness is being waived through 2025. So no one will owe federal taxes on forgiven student loans next tax season.
You may have to pay state or local taxes on that relief, though.
States that tax student loan debt relief
Most states have conformity with the federal tax system, which means they follow the IRS’ lead when it comes to tax regulations. Since the federal government is not currently taxing student loan relief, these states won’t either.
But there are 13 states that don’t have conformity with federal guidelines. Of those, five states tax student loan forgiveness: Arkansas, Indiana, Mississippi, North Carolina and Wisconsin. Here are the rules and exemptions for each state, and how much you might owe.
Note, the below calculations do not include any tax deductions or credits you might be eligible for.
Arkansas
Arkansas has a graduated state income tax that ranges from 2% to 3.9%, depending on how much you make each year.
If you earned $50,000 in 2024 and had $10,000 forgiven in student loans, for example, your taxable income would total to $60,000. This would put you in the 3.9% tax bracket, and would mean you’d owe approximately $390 in state taxes on your student debt.
Indiana
Residents of Indiana are on the hook for paying both state and local taxes for forgiven debt. There are no exemptions for those enrolled in the Public Service Loan Forgiveness program.
Indiana has a flat state tax rate of 3.05%. Local taxes vary by county.
If you received $10,000 in forgiven student loans in 2024, you would be on the hook for $305 in state taxes next year. If you live in Indianapolis (Marion County) you would also pay 2.02% in county income tax, or $202. This would bring your tax total to $507 for your forgiven debt.
Mississippi
Mississippi also has a progressive income tax rate. In 2024, you’ll pay 0% for the first $10,000 you earn, and 4.7% in state income tax on earnings above that. So, if you make $50,000 in 2024 and receive $10,000 in student loan debt, you’d be taxed on $60,000 total. You’d effectively owe $470 on your forgiven student loan debt.
North Carolina
If you received student loan forgiveness and live in North Carolina, you’ll pay a flat state income tax rate of 4.5% on your canceled debt for 2024. That means you’d owe approximately $450 in taxes for your loan debt.
There are some exemptions to this tax law: Borrowers enrolled in the Public Service Loan Forgiveness program will not be taxed on forgiven loan balances in North Carolina.
Wisconsin
Student loans that were forgiven in 2024 are subject to state taxes in Wisconsin. However, there are some exceptions. If your loans were forgiven under the Public Service Loan Forgiveness program, teacher loan forgiveness program, National Health Service Corps Loan Repayment plan, or if you meet total and permanent disability qualifications, you’ll be exempt from this tax.
If you receive any other type of student loan forgiveness, you’ll be charged between 4.40% and 7.65% in state income taxes. If you made $50,000 in 2024 and received $10,000 in loan forgiveness, you’d be taxed at the 5.3% rate, and would owe roughly $530 in student loan taxes. This could change if you’re married and your spouse’s income pushes you into a lower or higher tax bracket.
How to pay taxes on your forgiven student loans
If you receive student loan forgiveness, you’ll receive a Form 1099-C that lists the amount forgiven.
“That amount is tax-free on your federal income tax return and on all but the five states,” said Mark Kantrowitz, student loan expert and CNET expert review board member.
If you live in one of the five states that does tax student debt relief as income, you’ll need to file that form when you do your taxes, along with the documents that indicate income you receive from a job, for example.
You can do this on your own by using the IRS Free File tool, but many taxpayers get help from software like TurboTax (which was CNET’s top pick for tax filing in 2024) or a certified public accountant.
What if I can’t afford the taxes on my student debt?
Borrowers who aren’t able to pay the taxes they owe might be eligible for an installment plan. This is an agreement with the IRS that lets you pay the taxes over an extended timeframe.
Keep in mind, though, that there are different kinds of extensions. An extension on the filing deadline allows you more time to submit your tax paperwork, but won’t extend the payment due date. Whereas an installment plan is a separate agreement that does extend the payment due date.
Kantrowitz also notes that if you are considered insolvent — which means your debts exceed your assets — you might be able to have your taxes forgiven.
If my student loans are forgiven in 2025, will I owe federal taxes?
No. All student loan cancellation is exempt from federal taxes through the end of 2025, according to Kantrowtitz. That means if your loans are forgiven in 2025, you will not owe federal taxes.
Congress could decide to extend the exemption, but as it stands now, student debt relief will be taxed federally beginning in the 2026 tax year.
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