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Forgiven student loan balances are taxable income in Indiana

Student Loan

Hoosiers who have student loans erased by the federal loan forgiveness plan will be liable for state income tax unless the legislature makes an exception to state law. Forgiven debt is considered income in Indiana.

The plan, announced by President Joe Biden in August, will dismiss up to $10,000 for borrowers earning less than $125,000 or couples earning less than $250,000. Borrowers who qualified for Pell Grants are eligible for an additional $10,000 loan forgiveness.

The state’s individual income tax rate is 3.23%. Indiana counties also levy a personal income tax. That rate varies by county with the average being 1.74%.

That means an individual receiving $10,000 in loan forgiveness could be liable for state and county income taxes of $497 or more. A couple qualifying for the maximum loan discharge could see a tax increase of $1,988 or more.

Rep. Gregory Porter, D-Indianapolis, ranking Democrat on the House Ways and Means Committee, announced his plan to amend the situation.

“Many student borrowers have paid back their original loan amount and then some, but interest rates have kept them from paying off their debt and allocating that money toward buying a house, saving for retirement or starting a family,” Porter said in a statement Tuesday.

“Because taxing student debt relief when we have a $6.1 billion and growing surplus is unfair and needlessly counterproductive, I am drafting a bill to retroactively eliminate and nullify any state individual income tax being imposed on Hoosiers who are finally in a position to receive vital student debt relief,” Porter added.

House Speaker Todd Huston, R-Fishers, said via email, “We’re aware of the issue and I expect for conversations to continue as we head into the next legislative session.”

Indiana is one of seven states currently intending to levy income tax on forgiven student debt. The others are Arkansas, California, Minnesota, Mississippi, North Carolina and Wisconsin.

Pennsylvania, which normally considers forgiven debt to be taxable income, issued guidance last year stating that student debt forgiven by any of several federal programs would not be taxed and has recently stated that it will not tax loans forgiven under Biden’s plan, according to the Tax Foundation.

More than 900,000 Hoosiers have student loan debt, which amounts to 13.4% of the state’s population according to the Education Data Initiative. The average balance is nearly $33,000 with total student loan debt in the state totaling $29.8 billion.

This article originally appeared on The Center Square.

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