Will Your State Tax Your Canceled Student Debt?

Several states are poised to collect income taxes on student loan forgiveness — a move that could leave some borrowers owing as much as $1,000 during tax season.

Individuals in Indiana, Mississippi and North Carolina will almost certainly pay state income taxes on their forgiven federal student loans, according to representatives of those states’ revenue departments and analysis from the Tax Foundation, a tax policy think tank based in Washington, D.C.

Meanwhile, a handful of other states are tentatively planning to tax forgiven student loan debt unless their legislatures take measures to prevent it.

President Joe Biden’s executive order on Aug. 24 could erase all remaining federal student loan debt for as many as 20 million borrowers, according to the White House, and reduce the debts of millions more. In general, borrowers are eligible for up to $20,000 in debt cancellation if they earn less than $125,000 and file taxes as an individual or are married, file jointly and earn less than $250,000.

While the federal government explicitly stated in the March 2021 American Rescue Plan Act that it won’t collect taxes on student debt forgiven through Dec. 31, 2025, not all states are held to the same pledge. Here’s what we know about the rest.


Forgiven student debts are expected to be taxed as income in Arkansas. However, that’ll change if the state’s legislature takes action, said Scott Hardin, an Arkansas Department of Finance and Administration spokesperson, in an email. Hardin noted that the state’s legislature took action to exempt PPP loans from taxation and froze taxation on unemployment payments for two years.

Arkansas has a graduated income tax rate that ranges from 2% to 4.9% depending on annual income, according to the state’s Economic Development Commission. Individuals making less than $5,000 are exempt from state income tax.


Forgiven student debts will be taxed as income in California, said Andrew LePage, a spokesperson for California’s Franchise Tax Board, in an email. That’s because student loan forgiveness isn’t occurring under Section 1098-E of the federal Education Code, LePage said, and therefore, it doesn’t meet an exclusion requirement in the state’s tax code. Section 1098-E, titled “Income-Based Repayment,” is in Chapter 28 of the federal Education Code, which pertains to higher education and student financial aid, according to the U.S. Government Publishing Office.

If the federal government states that the program is occurring under Section 1098-E, borrowers wouldn’t have to pay taxes on that debt in California, LePage said.


Indiana residents will be taxed on forgiven student loan debts, said Natalie Rodriguez, assistant director of communications at Indiana’s Department of Revenue, in an email.

The state’s income tax rate is 3.23%, so individuals could pay up to $323 in taxes for $10,000 in student loan forgiveness or $646 for up to $20,000 in student loan forgiveness, Rodriguez said. Indiana residents will also have to pay additional county taxes on the forgiven debts, Rodriguez said.


In Minnesota, forgiven student debts are expected to be taxed as income, said Ryan Brown, a spokesperson for Minnesota’s Department of Revenue, in an email. However, that’ll only change if the state’s legislature takes a specific action, Brown said.

Minnesota has a graduated income tax rate, depending on your annual income. The tax rate ranges from 5.35% for individuals earning no more than $28,080 to as much as 9.85% for individuals earning more than $171,220, according to the state’s Department of Revenue.


Mississippi is expected to tax forgiven student loan debt as income, according to the Tax Foundation. Mississippi’s Department of Revenue could not be reached for comment by NerdWallet.

Mississippi charges a 5% income tax on all annual income over $10,000, according to the Tax Foundation.

North Carolina

Forgiven student loan debts are expected to be taxed as income in North Carolina, said Thomas Beam, public affairs manager at North Carolina’s Department of Revenue, in an email. But the rate at which individuals will be taxed remains unclear.

The state’s individual income tax is currently 4.99%, but that figure changes to 4.75% in 2023 and gradually decreases until 2026, when the rate will stand at 3.99%, per the state’s Department of Revenue.


As it stands, forgiven student loan debts will be taxed as income in Wisconsin. Changing that would require specific action from the state legislature, said Patty Mayers, communications director at Wisconsin’s Department of Revenue, in an email. That action hasn’t been taken yet, Mayers said, but it could still take place in January when the state legislature is back in session.

“We have addressed this discrepancy with federal law in our department’s biennial budget request, in an effort to ensure Wisconsin taxpayers don’t face penalties and increased taxes for having their loans forgiven,” Mayers said.

Wisconsin’s income tax rate ranges from 3.54% to 7.65%, depending on annual income and whether you’re married or single, according to the state’s Department of Revenue.

How to prepare if you’re affected

Whether those taxes are owed during the 2022 tax season (in early 2023) or the 2023 tax season will depend on a few factors, including when an individual completes the U.S. Department of Education’s debt cancellation application. The form is expected to become available in October and close in December 2023, per the Department of Education website.

If you live in a state that might tax your forgiven student loans, consider using an online tax calculator to get an idea of how much you’ll need to save. In many cases, your state’s Department of Revenue website or its franchise tax board website will have such a calculator.

You can also consider using a budget app to automatically siphon off what you’ll need to set aside from each paycheck.

Cara Smith writes for NerdWallet.

Image from 123fr.com

Buying a New Car? Prepare for Over $10K in Yearly Ownership Costs

The annual cost of owning and operating a new car ballooned nearly 11% in the past year to $10,728 — or $894 per month — according to AAA’s Your Driving Costs study.

That represents a considerable hike from 2021, when it cost an estimated $9,666, or $805 per month, to own a new car. Costs normally don’t rise that dramatically year over year: In 2021, annual new car ownership costs rose 5% over 2020’s figures, according to AAA.

The cost estimate in the 2022 study doesn’t include the monthly principal payment for those who take out a loan, so drivers will want to make sure to budget for the full cost of car ownership when buying a new car.

Why is it more expensive to own a new car?

Unsurprisingly, the AAA report cited fuel prices as the main culprit behind this year’s sky-high rise. Gas prices climbed steadily for more than a year before peaking at an average of over $5 a gallon in June, and U.S. drivers are on track to spend up to $562 billion on gasoline this year — twice as much as they spent on gasoline in 2020. The growing price of gas is being fueled by overall inflation, as well as by supply-chain impacts from Russia’s invasion of Ukraine.

The costs of all goods and services in the U.S. is up 8.5% year over year, according to the Bureau of Labor Statistics, and gas prices rose a whopping 44% over the same period. National pump prices have eased to an average of $3.95 per gallon (regular unleaded), which is still considerably higher than the $3.18 a gallon in August 2021.

The AAA report, released Aug. 11, assumed an average fuel price of 17.99 cents per mile, or roughly $3.99 per gallon, based on a weighted average of gas prices in the first five months of 2022. Gas prices continued their climb after the report was conducted (and remain volatile), and AAA said in a press release that new car ownership costs for 2022 may end higher than the report estimates.

Additional factors affecting costs

Per-mile fuel prices vary widely by type of vehicle, of course, ranging from 12.51 cents per mile for a small sedan to 24.63 cents for a half-ton pickup. Where you live makes a difference, too, with current average prices ranging from a low of $3.46 a gallon in Texas to $5.37 a gallon in California.

AAA evaluated 45 top-selling midpriced vehicles across six categories. While insurance prices saw larger increases in 2022, other ownership costs rose more modestly:

  • Depreciation: $3,900 a year ($3,656 in 2021).
  • Finance: $712 a year ($658 in 2021).
  • Fuel: 17.99 cents per mile (10.72 cents per mile in 2021).
  • Insurance: $1,588 a year ($1,342 in 2021).
  • License, registration and taxes: $675 a year ($669 in 2021).
  • Maintenance, repair and tires: 9.68 cents per mile (9.55 cents per mile in 2021).

The average Manufacturer’s Suggested Retail Price — or MSRP — of a new vehicle is $33,301 in 2022 versus $32,903 in 2021, according to AAA. The study assumed vehicles would be driven roughly 15,000 miles per year and be owned for five years.

How can I save money on new car ownership costs?

Drivers who prefer a new car to a used car can consider switching to an electric vehicle or hybrid vehicle. It would cost approximately $600 per year to charge an electric vehicle, AAA estimates, compared with the $2,100 per year to fill up a gas tank. Of course, electric vehicles can often be expensive, so make sure the fuel savings aren’t canceled out by the overall cost of the car.

You can also download a gas app, such as GasBuddy or Upside, to help you find the most affordable gas in your area.

On an overall basis, a small gas-powered sedan has the cheapest ownership costs at 54.56 cents per mile, compared with 60.32 cents for an electric car and 64.61 cents for a hybrid, according to the AAA study. A half-ton pickup tops the list at 86.21 cents per mile.

You can check for cheaper insurance rates, too. A NerdWallet survey from 2017 found that roughly 43% of insured drivers hadn’t shopped for new insurance in at least a year, even though shopping for better deals could’ve yielded savings as high as $400 per year.

Cara Smith writes for NerdWallet.

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