STUDENT LOAN DEBT CANCELLATION- THE GOOD, THE BAD, AND THE UGLY

President Joe Biden announced on Monday, October 17, 2022, the formal launch of the federal
student loan forgiveness application for millions of student loan borrowers. Most individuals with federal
student loan debt that are below the income threshold ($125,000 individually or $250,000 for a family)
will qualify for Biden’s debt relief plan. Individuals seeking to apply can now fill out the application on
Studentaid.gov. While the application does not require documentation about your income or your student
loans, it will ask that you input your social security number, date of birth, phone number, and email
address.

With the launch of the application, however, comes discussion of federal and state tax
implications for those who choose to receive the federal grant. The main question consumers are asking:
will I have to pay income taxes on the amount of student loan forgiveness I receive?

The Good

Generally, a discharge of student indebtedness is considered taxable income. However, under §
9675 of the American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package, forgiveness
of student loan debt between 2021-2025 will not be considered as federal taxable income.

The Bad

While your loan forgiveness won’t be treated as income for federal tax purposes, several
states (such as Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin)
currently will not follow the American Rescue Plan Act for various reasons and will include the debt
relief as taxable income as a consideration for state income taxes.

The Ugly

For consumers in Arkansas, the discharge of student indebtedness will likely constitute taxable
income – absent state legislation action. Currently, Arkansas’s tax code is silent on the treatment of
student loan debt forgiveness – so the ordinary debt discharge rules would prevail – making the amount
forgiven taxable at the state income level.

While Arkansas’s tax code is silent on the issue, the legislature may pass provisions to prevent
the debt relief from being considered as income on state taxes before the next legislative session is
complete. Scott Hardin, a spokesman of the Arkansas Department of Finance and Administration, says
“We will not be certain on the tax implications of student debt relief in Arkansas until the legislative
session is complete and details of the loan forgiveness plan are finalized by the U.S. Department of
Education.” More or less, Arkansas citizens will have to play the waiting game to see the impact of
federal student loan forgiveness on their state income taxes.

Update as of October 24, 2022: The Eighth Circuit Court of Appeals issued a stay late Friday that
temporarily blocks President Biden’s plan to forgive student loan debt. This effectively throws the
program in limbo, and it is unclear what the decision will mean for the 22 million borrowers who have
already applied for the relief. We will revise this article as updates are published as to the status of the
federal student loan relief program.

Disclaimer:

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