Jess Smith | 

These States Will Tax the Money You Receive in Student Debt Relief

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People with student loans: I’ve got good news and bad news. The good news is that if you have student debt and make under $125,000, you won’t have to worry about paying $10,000 – $20,000 of it back. The bad news is that the government might tax debt relief you receive.

Outstanding student loans can stop you from buying houses, leasing cars, and other significant life moments. So this kind of federal relief is big. But … the Biden Student Debt Plan might add a little stress during tax time. Student debt relief is tax-free at a federal level, but when it comes to state returns, you could run into some taxes if you live in certain areas.

Do you live in one of the states that could tax your forgiven student debt? How much money could you get taxed for?


What is the Biden student debt plan?

President Joe Biden student loan forgiveness plan details

The student debt cancellation plan is an executive order signed by President Joe Biden that cancels $10,000 to $20,000 of debt from federal student loans.

Announced on Aug. 24, 2022, the plan says individuals making under $125,000 will get $10,000 in canceled debt, and if you got a Pell grant, you’d get $20,000 in relief.

MORE: We have a complete breakdown of the student loan forgiveness plan that answers all your questions about who gets it, when they get it, and so on — so check that out.


Will canceled student debt get taxed?

man and woman on couch with laptop, calculator, and paperwork

Student debt cancellation won’t get taxed — at least not on a federal level. When the American Rescue Plan of 2021 passed, it made student debt relief nontaxable through 2025.

The White House confirmed that this includes debt canceled through the federal student loan forgiveness program.

But when it comes to states, though, it’s a different ball game. The Rescue Plan doesn’t prevent states from taxing student debt relief.



Which states could get their student debt relief taxed?

tax forms for Biden student debt forgiveness plan and calculator

According to the Tax Foundation, five states may count debt relief as taxable income.

You could get taxed if you live in:

  • Arkansas
  • Minnesota
  • Mississippi
  • North Carolina
  • Wisconsin

The federal government tells states what they believe should count as taxable income. But while many states follow those guidelines, others don’t. States have the right to decide what counts as taxable income. And in the case of student debt relief, those five states have decided to count student debt relief as taxable income.


How much money would you have to pay if your Biden student debt relief gets taxed?

man on laptop with tablet nearby

Based on the Tax Foundation analysis, taxpayers could expect to pay $300 – $1,000, based on income and their state. It’s a lot less than the $10,000 – $20,000 of debt forgiven, but it’s still an unwelcome tax bill.

To get a better idea, ask your local tax preparer. And if you have to pay up, we’ve got lots of tax day coupons and freebies to lessen the sting.



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