(The Center Square) – Hoosiers whose student loans have been forgiven by the federal loan forgiveness plan will be liable for state income tax unless the legislature makes an exception to the law of the state. Canceled debt is considered income in Indiana.
The plan, announced by President Joe Biden in August, will disallow up to $10,000 for borrowers earning less than $125,000 or couples earning less than $250,000. Borrowers who have qualified for Pell Grants are eligible for an additional loan forgiveness of $10,000.
The state personal income tax rate is 3.23%. Indiana counties also levy a personal income tax. This rate varies by county, with the average being 1.74%.
This means that someone receiving $10,000 in loan forgiveness could be liable for state and county income taxes of $497 or more. A couple eligible for the maximum loan release could see a tax increase of $1,988 or more.
Rep. Gregory Porter, D-Indianapolis, a ranking Democrat on the House Ways and Means Committee, announced his plan to change the situation.
“Many student borrowers have repaid their original loan amount, then some, but interest rates have prevented them from paying off their debt and using that money to buy a home, save for retirement or starting a family,” Porter said in a statement Tuesday. .
“Because taxing student debt relief when we have $6.1 billion and a growing surplus is unfair and unnecessarily counterproductive, I am drafting a bill to retroactively eliminate and cancel any tax on personal income taxed on the Hoosiers who are finally able to receive vital student debt relief,” Porter added.
House Speaker Todd Huston, R-Fishers, said via email: “We are aware of the issue and I expect conversations to continue as we head into the next legislative session.”
Indiana is one of seven states that currently intend to levy an income tax on canceled student debt. The others are Arkansas, California, Minnesota, Mississippi, North Carolina and Wisconsin.
Pennsylvania, which normally considers forgiven debt taxable income, issued guidelines last year stating that student debt forgiven by one of several federal programs would not be taxed and recently said it would not tax not loans canceled under Biden’s plan, according to the Tax Foundation.
More than 900,000 Hoosiers have student loan debt, representing 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.