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North Carolina Will Tax Student Loan Forgiveness

The Biden Administration has forgiven federal student debt for up to $20,000 for eligible individuals. Thanks to the American Rescue Plan, student loan forgiveness is exempt from federal taxes, and most state taxes. However, some states say they will tax loan forgiveness as income, meaning eligible borrowers would have to pay up to $1,000 in taxes to take advantage of federal loan forgiveness. 

 

This has put many lower and middle class borrowers in a complicated situation. Some may decide to forgo loan forgiveness because they are unable to pay the state taxes on it. 

Why Are Some States Taxing Student Loan Forgiveness? 

Prior to the American Rescue Plan, student debt cancellation was considered taxable income by both the state and federal government. Following the Plan, the federal government has chosen to make student debt cancellation exempt from federal taxes. Most states have followed federal tax policy but several states have chosen to either deviate from the federal standard or have yet to update their legislature with these exemptions. 

Student facing debt. Biden student loan forgiveness will be taxed in North Carolina.

North Carolina is one of the states whose GOP-led state legislature has decided to not adopt the federal debt relief tax exemption. Governor Roy Cooper is pushing to make forgiveness un-taxable, but for now, student debt relief in North Carolina is not exempt. 

 

The other states who will tax student loan forgiveness are: Mississippi and Indiana. Decisions about taxation are still under review in: Wisconsin, West Virginia, Minnesota, California and Arkansas. 

Who Is Eligible for Student Loan Forgiveness

Borrowers who have taken out federal student loans are eligible for $10,000 of relief while students who are also eligible for Pell Grants, a federal financial grant given to students from low income families, can receive up to $20,000 in relief. To qualify, individual borrowers must have an annual income of less than $125,000 – $250,000 annually if you are married – in either 2020 or 2021. 

 

Applications for student loan forgiveness will open in mid-October 2022.