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The new income-driven repayment plan (IDR) proposed by President Joe Biden (known as the SAVE plan) may be able to forgive some student loans for millions of borrowers. However, according to a report by the Tax Foundation, some states may still tax student debt savings even though discharged student debt is exempt from federal taxation under the American Rescue Plan Act of 2021.
It has been reported that Indiana, North Carolina, and Mississippi will in fact tax the balance of forgiven student loans as income. There is a possibility that taxpayers in Arkansas and Wisconsin may also owe taxes on forgiven student loans, but from what we know, these states are still reviewing their tax laws. Other states could still introduce rulings on how they will treat this debt forgiveness as we head into the 2023/2024 tax season.
In August this year, the Saving on a Valuable Education plan (SAVE) was introduced by the Biden administration to continue to deliver on his promise to help student loan borrowers after the Supreme Court struck down Biden's original student loan forgiveness plan.
The SAVE plan is expected to benefit over 20 million Americans with student debt who have been paying back their debts for over 20 years. It is estimated that over one million Americans have already received cancellations of their debts. In a statement, the White House said the new IDR plan would reduce monthly payments to zero for borrowers earning $32,800 a year or less. The maximum repayment period rises by one year for every additional $1,000 borrowed for borrowers borrowing $12,000 or less.
To apply for SAVE or get more information on how to qualify for student debt forgiveness, visit www.studentaid.org.
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Frequently Asked Questions
Is forgiven student loan debt under the SAVE plan taxable at the federal level?
No, forgiven student loan debt is exempt from federal taxation under the American Rescue Plan Act of 2021. However, this federal exemption does not necessarily extend to state income taxes, so borrowers should check their specific state's tax laws before assuming their forgiven debt is entirely tax free.
Which states are confirmed to tax forgiven student loan debt as income?
Indiana, North Carolina, and Mississippi have confirmed they will tax the balance of forgiven student loans as ordinary income. Borrowers in these states should be prepared for a potentially significant state tax bill depending on the amount of debt that is forgiven.
Are there any other states that might tax student loan forgiveness under the SAVE plan?
Arkansas and Wisconsin are still reviewing their tax laws and may also require borrowers to pay state taxes on forgiven student loan balances. Additionally, other states could introduce new rulings on how they will treat this debt forgiveness as the 2023/2024 tax season approaches, so borrowers should monitor any updates from their state tax authorities.
Who qualifies for zero monthly payments under the SAVE plan?
Borrowers earning $32,800 per year or less may qualify for monthly payments reduced to zero under the SAVE plan. The plan is designed to benefit over 20 million Americans who carry student debt, and over one million borrowers have already received cancellations of their debt.
How does the SAVE plan's repayment period work for smaller loan balances?
For borrowers who originally borrowed $12,000 or less, the maximum repayment period increases by one year for every additional $1,000 borrowed. To apply for the SAVE plan or learn more about eligibility requirements, borrowers can visit www.studentaid.org.
About the Author
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Nick Charveron is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.