President Biden’s administration successfully canceled student debt during more than 5 million borrowersdespite recent legal obstacles, Save on a Valuable College Reimbursement Plan and the “Plan B” Debt Relief Proposal faced.

Fate of Student Loan Cancellation Remains Uncertain especially under a Trump presidency. But if your student debt was erased last year, you may have to pay taxes on your canceled debt.

Here’s everything you need to know about how student loans impact your tax return.

Learn more: Have you made money through PayPal, Venmo, or Cash App this year? The IRS will know

Do I have to pay taxes if my student debt is canceled?

It depends on where you live.

Student debt relief is generally taxed as income, so any forgiven loan amounts are added to your adjusted gross income: If you earn $50,000 and $20,000 in loans are forgiven, your adjusted income that year is $70,000. However, thanks to a provision inserted in the American Rescue Planfederal taxes on forgiven student debt are waived through 2025. So no one will owe federal taxes on forgiven student loans next tax season.
However, you may have to pay state or local taxes on this relief.

States mandate student debt relief

Most states follow the federal tax system, meaning they follow the lead of the IRS when it comes to tax regulations. Since the federal government doesn’t currently tax student loan relief, these states won’t either.
But 13 states are not in compliance with federal guidelines. Of these, five states mandate student loan forgiveness: Arkansas, Indiana, Mississippi, North Carolina And Wisconsin. Here are the rules and exemptions for each state, along with how much you could owe.

Note that the calculations below do not include any tax deductions or credits to which you may be entitled.

Arkansas

Arkansas has a progressive income tax that ranges from 2% to 3.9%depending on how much you earn each year.

If you earned $50,000 in 2024 and received $10,000 in student loan forgiveness, for example, your taxable income would total $60,000. That would put you in the 3.9% tax bracket and mean you would owe about $390 in state taxes on your student debt.

Indiana

Indiana residents must pay state and local taxes for debt forgiveness. There are no exemptions for those enrolled in the Public Service Loan Forgiveness program.

Indiana has a flat tax rate of 3.05%. Local taxes vary by county.

If you received $10,000 in student loans forgiven in 2024, you’ll have to pay $305 in state taxes next year. If you live in Indianapolis (Marion County), you’ll also pay 2.02% county income tax, or $202. This would bring your tax total to $507 for your forgiven debt.

Mississippi

Mississippi also has a progressive income tax rate. In 2024, you’ll pay 0% on the first $10,000 you earn, and 4.7% state income tax on income above that. So if you earn $50,000 in 2024 and receive $10,000 in student debt, you would be taxed on a total of $60,000. You would effectively owe $470 on your canceled student debt.

North Carolina

If you received student loan forgiveness and live in North Carolina, you will pay an amount flat income tax rate of 4.5% on your canceled debt for 2024. This means you will owe approximately $450 in taxes for your loan debt.

There are some exemptions to this tax law: Borrowers registered with Public Service Loan Forgiveness Program will not be taxed on forgiven loan balances in North Carolina.

Wisconsin

Student loans that were forgiven in 2024 are subject to Wisconsin state taxes. There are, however, a few exceptions. If your loans were forgiven under the Civil Service Loan Forgiveness Program, Teacher Loan Forgiveness Program, National Health Service Corps Loan Repayment Plan, or if you meet the disability criteria total and permanent, you will be exempt from this tax.

If you benefit from another type of student loan forgiveness, you will be charged fees between 4.40% and 7.65% in state income taxes. If you earned $50,000 in 2024 and received $10,000 in loan forgiveness, you would be taxed at a rate of 5.3% and would owe about $530 in student loan taxes. This could change if you’re married and your spouse’s income pushes you into a lower or higher tax bracket.

How to Pay Taxes on Your Forgiven Student Loans

If you receive student loan forgiveness, you will receive a Form 1099-C which indicates the amount remitted.

“This amount is tax-free on your federal tax return and in all but five states,” said Mark Kantrowitz, a student loan expert and member of CNET’s expert review panel.

If you live in one of the five states that taxes student debt relief as income, you will need to file this form when you do your taxes, along with documents showing the income you receive from a job, For example.

You can do it yourself using the Free IRS File Toolbut many taxpayers get help from software like TurboTax (which has been CNET’s top pick for the tax declaration in 2024) or a chartered accountant.

What happens if I can’t pay taxes on my student debt?

Borrowers who are unable to pay the taxes they owe may be eligible for an installment plan. It is an agreement with the IRS this allows you to pay taxes over an extended period of time.

Keep in mind, however, that there are different types of extensions. An extension on the deposit The deadline gives you more time to submit your tax documents, but will not extend the payment due date. While an installment plan is a separate agreement that do extend the payment due date.

Kantrowitz also notes that if you are considered insolvent – ​​meaning your debts exceed your assets – you may be able to get a tax forgiveness.

If my student loans are canceled in 2025, will I have to pay federal taxes?

No. All student loan forgiveness is exempt from federal taxes through the end of 2025, according to Kantrotitz. This means that if your loans are forgiven in 2025, you won’t owe federal taxes.

Congress could decide to extend the waiver, but as it stands, student debt relief will be federally mandated starting in fiscal year 2026.

More advice on student loans