Some federal student loan forgiveness subject to state, county income tax

Federal student loan repayments are restarting this month, and some borrowers may be eligible for loan relief or forgiveness. Borrowers whose loans are forgiven should be aware that Indiana taxes some of those balances as income.

Some Indiana borrowers could see up to thousands of dollars added to their state income tax if they’re eligible for student loan forgiveness. The exact amount depends on the type of loan forgiveness, the county you live in and the remaining balance of any partially forgiven loans.

The Internal Revenue Service does not tax most types of student loan forgiveness, and that practice was expanded when the American Rescue Plan Act was passed in 2021.

That same year, Indiana lawmakers passed a provision that requires certain Indiana borrowers to pay adjusted gross income tax on the balance of federally forgiven loans between 2021 and 2025.

READ MORE: What do Hoosiers need to know about Indiana’s taxation of student loan forgiveness?

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Borrowers will not have to pay state taxes on loans forgiven due to total and permanent disability, or certain types of repayment plans. For more information, the Indiana Department of Revenue recommends reaching out to your student loan servicer.

Kirsten is our education reporter. Contact her at kadair@wfyi.org or follow her on Twitter at @kirsten_adair.

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