When federal student loan borrowers take a breath from celebrating the cancellation of some or all of their federal student loans, millions of them could be in for an unpleasant surprise: While President Biden's sweeping student debt relief won't be subject to federal income tax, in seven states borrowers may have to pay state income tax on all those canceled loans, NPR.org reported. Before 2021, student debt cancellation was generally considered a form of income, and therefore taxable both at the federal and usually state levels. But in March 2021, the American Rescue Plan changed that, at least temporarily: Until the end of 2025, Congress said, the U.S. government will not consider canceled student loan debts to be taxable income. Now that the Biden administration has unveiled its sweeping new debt cancellation plan, this federal exemption is a really big deal. That's because most places follow the federal government's lead when it comes to income tax. "The majority of states that have an income tax essentially say, 'Whatever the federal government says is gross income, we say the same thing,'” explains John Brooks, a Fordham University professor who studies both tax policy and student loan law. But seven states are out of step with federal tax policy and have either said they will tax debt relief or still have policies that could require it, barring a change in state law. States where borrowers may be taxed for loan cancellation include: North Carolina, Indiana, Mississippi, Arkansas, Minnesota, Wisconsin and California.
