INDIANAPOLIS – Roughly 900,000 Hoosiers have federal student loan debt, and about a third of them may have the remainder of their student loans forgiven under the Biden administration’s new program, according to statistics from the Education Data Initiative. But that loan forgiveness is subject to state and county income tax in Indiana.
According to the Indiana Department of Revenue, borrowers would have to pay income tax for 2022 on any student loan forgiveness received, and the amount depends on how much debt is canceled.
With Indiana’s state income tax rate at 3.23%, Hoosiers who receive $10,000 in student loan forgiveness would have to pay an additional $323 in state income tax. Pell Grant recipients who receive $20,000 in loan forgiveness would face an additional $646 in taxes. County income tax would also be applied, according to the Indiana Department of Revenue.
State Rep. Greg Porter (D-Indianapolis) said he wants to exempt student loan forgiveness under the national program from state income tax.
“Why would we want to be prescriptive and punitive toward those students that we’re trying to attract to our state?” Porter said.
Because a bill has not been drafted, Porter did not have any estimates on how much his proposal would cost the state. But he believes Indiana can afford it, citing the state’s surplus, which topped $6 billion after the close of the fiscal year earlier this summer. (The state later returned $1 billion to taxpayers during the special legislative session.)
“It just makes good sense,” Porter said. “It’s an investment.”
House Speaker Todd Huston (R-Fishers) declined our request for an interview but provided a statement, which reads: “We’re aware of the issue and I expect for conversations to continue as we head into the next legislative session.”
David Gamage, a professor at the IU Maurer School of Law, said if lawmakers don’t remove the state tax requirement, some Hoosiers may qualify for an exemption.
“If the person who has loans forgiven has overall liabilities in excess of assets… portions or maybe the entire amount of the loan forgiveness might not be included in Indiana state income tax,” Gamage explained.
Student loan debt canceled under this program is not subject to federal income tax, Gamage said.
The Indiana Department of Revenue plans to provide instructions to taxpayers on how to report any student loan forgiveness, according to a spokesperson.