Indiana will tax loan forgiveness as income

INDIANAPOLIS — Indiana will tax student debt relief as income, similar to many other states, following the Biden administration's announcement of forgiveness last month.

The Indiana Department of Revenue confirmed in an email Tuesday that residents are required to list their forgiven loans as taxable income per Indiana law.

"The state is saying is because you've benefited from this because your balance sheet changed, we're going to have to collect tax on that," Your Money Line CEO, Peter Dunn said.

More than 40 million Americans could see their student loan debt cut or eliminated under President Joe Biden's plan, which is erasing $10,000 in federal student loan debt for individuals with incomes below $125,000 a year, or households that earn less than $250,000. Federal Pell Grant recipients could receive an additional $10,000 in federal forgiveness under the plan.

But depending on the state’s tax rates, the taxpayer’s other income, and the deductions and exemptions they’re able to claim, residents could owe up to several hundred additional tax dollars on the forgiven loans.

Indiana’s tax rate is 3.23%. For Hoosiers receiving $10,000 in loan forgiveness, this means they will pay up to $323 in income tax. Pell Grant recipients could owe around $646, Natalie Rodriguez, communications manager for the Department of Revenue, said via email on Tuesday.

Residents must also pay additional county taxes on the forgiven loans. The rates vary by county.

An Indiana Department of Revenue spokesperson tells WRTV the money collected by the state will go towards to the state's general fund.

In Marion County, those who received debt relief will owe an additional $202 if they received $10,000 in relief or $404 if they received $20,000 in relief.

A person living in Marion County, who received $20,000 in student loan debt relief will be taxed up to $850 for the relief.

Under the Biden administration's plan, people who paid on their loans during the pause that began in March 2020, are eligible for a refund from the loan servicer.

"Then they will owe tax on that as well. So this isn't just about forgiveness, in some aspects, it's about a refund," Dunn said.

A spokesperson from the Department of Revenue adds in an email exchange with WRTV:

"For refunded loans, the tax treatment is same as federal with one caveat. The caveat is that if the loan is refunded and then the loan is wholly or partially forgiven, then the forgiven portion would be taxable/nontaxable for Indiana purposes based on the provision of federal law under which it was forgiven (general discharge, taxable with the exception of insolvency, death/disability not taxable, PSLF, not taxable)."

Forgiven student loans will be subject to state income taxes unless states, including Indiana, change their laws to conform with a federal tax exemption for student loans.

“The student loan forgiveness is not 100% happening. I mean, there's still a slight chance that doesn't happen based on people contesting it or having it being taken to court," Dunn added.

The Indiana State Teachers Association has called on legislators to remove the tax penalty.

“Educators facing a lifetime of crushing student debt finally received some relief under the forgiveness proposal by President Biden. Educators with student debt owe $58,700 on average. With pay lagging behind peers with similar levels of education, Hoosier educators celebrated the opportunity to have some, or all of their loans forgiven," said ISTA President Keith Gambill in a statement.

The statement continued, "... This is about doing what is right for working Hoosiers. We look forward to working with the General Assembly to make this happen.”

The Associated Press contributed to this report.