These States May Tax Canceled Student Loans

• North Carolina announced it will tax as income federal student loans discharged through President Joe Biden's debt-forgiveness plan.
• North Carolina is among a handful of states that did not adopt amendments to the federal Internal Revenue Code that exclude discharged student loans from taxation.
• Arkansas, Indiana, Minnesota, Mississippi, and Wisconsin may also tax discharged student loans.

North Carolinians who qualify for President Joe Biden's student debt forgiveness plan received some unwelcome news Aug. 31: The state will tax their total canceled student debt as income.

Biden last week announced his plan to cancel up to $10,000 in federal student loan debt for qualified borrowers and up to $20,000 for Pell Grant borrowers. That forgiven debt will not be subject to federal income taxes pursuant to the American Rescue Plan (ARP).

As part of the ARP, Congress enacted Section 108(f)(5) of the Internal Revenue Code (IRC) to expand the types of student loans that would not be subject to taxation.

However not every state follows the federal treatment of the IRC, and those states that didn't adopt this specific enactment in full may consider discharged student loan debt to be taxable income, according to an analysis by Jared Walczak of the nonprofit Tax Foundation.

In addition to North Carolina, states that may tax as income discharged student loan debt are Arkansas, Indiana, Minnesota, Mississippi, and Wisconsin, according to the Tax Foundation.

While North Carolina conforms to a post-ARP version of the IRC, its statute contains an add-back that taxes discharged student loan debt, according to the Tax Foundation analysis.

Indiana likewise conforms to a post-ARP version of the IRC.

However, state statute does not conform to the portion of the IRC containing the exemption of forgiven student loan debt, according to the Tax Foundation. The Indiana Department of Revenue confirmed in an Sept. 6 email to the Associated Press that residents must list their forgiven loans as taxable income.

Minnesota and Wisconsin conform to the IRC enacted prior to the ARP, according to the Tax Foundation, while Arkansas and Mississippi follow the standard treatment of all discharged debt as taxable income.

The Tax Foundation analysis notes that states are likely to issue additional guidance on the treatment of discharged student loan debt and perhaps even adopt legislative fixes so that borrowers are not subject to taxation of forgiven debt.

The North Carolina Department of Revenue said it would closely monitor enactments by the state's General Assembly that may change the taxability of student loan forgiveness.