That’s because certain states treat the amount of forgiven loans as income, meaning you’d pay taxes on that amount. (It won’t count as income on your federal tax return no matter where you live.) As seen below, most states will not tax loan forgiveness because they chose not to or don’t have an income tax to begin with, a few will, and some are undecided. President Joe Biden’s forgiveness initiative, announced in August, is slated to forgive up to $10,000 for borrowers with federally-held student debt. That number is $20,000 for those who went to college on Pell grants. Qualifying borrowers can receive loan forgiveness as long as they have individual income below $125,000 or $250,000 for married couples filing jointly. About 95% of federal student loan borrowers will qualify for the aid, and borrowers can apply for it now on the Federal Student Aid website. While millions will see their debts completely wiped out, some borrowers will be on the hook for higher end-of-year state income taxes. The bill could be more than $1,000 depending on the amount of forgiven debt and the income tax rate of the state. While debt forgiveness would be beneficial in the long run in most cases, borrowers do have the option to decline the forgiveness by calling their student loan servicer.
