Indiana will tax loan forgiveness, similar to other states

Indiana will tax student debt relief as income, reflecting similar policies in other U.S. states following the Biden administration’s announcement of a forgiveness plan last month.

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

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%, meaning those who are eligible to receive $10,000 in federal loan forgiveness will pay up to $323 in taxes, while Pell Grant recipients could owe around $646, Natalie Rodriguez, communications manager for the Department of Revenue, told The Associated Press on Tuesday via email.

Residents must also pay additional county taxes on the forgiven loans. For Marion County, which includes Indianapolis, residents would pay between $200 and $400, Rodriguez said.

Indiana House Speaker Todd Huston said in a statement Tuesday he was aware of the state’s policy and would “expect for conversations to continue as we head into the next legislative session,” which begins in January.

Other states — Mississippi, Minnesota, Wisconsin, Arkansas and North Carolina — also tax forgiven debt as income, according to a tally by the Tax Foundation, a Washington, D.C.-based think tank.

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.

Democratic state Rep. Rep. Greg Porter of Indianapolis condemned the policy in a statement Tuesday and said he was drafting legislation to retroactively eliminate state income tax on debt relief.

“I can’t say I’m surprised Indiana has chosen to take a punitive stance on a policy meant to give working-class Americans relief, but there’s still time to change this,” he said.