UPDATE: IN Tax on Student Loan Forgiveness

melanie.negrin@iuw.org | Nov 3rd, 2022
By Brian Lohsl, Impact & Public Policy Strategist

Indiana Department of Revenue updates information on state tax liability for individuals and families receiving Student Loan Forgiveness

On October 27, 2022, the Indiana Department of Revenue published updated information on how the state is taxing current Student Loan Forgiveness programs, including the Public Service Loan Forgiveness (PSLF) program and the One-time Student Loan Forgiveness program. Both programs were created to bring much needed financial relief to individuals and families overburdened by student debt. Forgiveness programs would reduce the financial burden on families by substantially reducing the balances of federal direct loans from the Department of Education.

A chart published on the Indiana Department of Revenue page entitled “Why is student loan relief taxable in Indiana when the federal government does not tax it?” indicates that PSLF “income” will not be taxed at the federal or the state level. However, one-time student loan forgiveness “income” will not be taxed at the federal level, but it will be taxed at the state level. At present, Indiana is one (1) of only four (4) U.S. states considering taxation of this income.

Tax Implications for ALICE Families

Indiana’s 2022 income tax rate is 3.23%, which means Hoosiers will owe Indiana income tax of:

  • $323 for $10,000 of student loan forgiveness and
  • $646 for $20,000 of student loan forgiveness

ALICE (Asset Limited, Income Constrained, Employed) families, a.k.a. working families, earn less than $51,456 annually and already struggling to pay for necessities like food, housing, childcare, transportation, technology, healthcare. This tax may force families to make difficult choices.

How Can I Advocate for My Community?

If this is a concern relevant to you and your community? Would you like to remain informed of changes to this topic, any relevant legislative updates, and opportunities to advocate for families in your community? Add your name to IUW’s Voter Voice Action Center.

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