Indiana is one of four states that taxes student loan forgiveness. This will include President Joe Biden’s recent one-time cancellation of student loan debt for eligible borrowers.
Officials in Indiana are urging borrowers to be cognizant of any taxes on their payments.
Andy Nielsen is a senior policy analyst for the Indiana Community Action Poverty Institute. He is urging Hoosiers to pay on time as much as they can.
“The advice we give to people is to file on time and to pay as much as you can by the deadline,” he said.
Nielsen pointed to underpayment fees that can exist if Hoosiers do not pay these taxes.
“If you live in a county that has a higher income tax and you’re above that $1,000 threshold, you start being subject to underpayment penalties by the Indiana Department of Revenue,” he said.
Taxes on forgiveness are treated like income tax – local income taxes vary by county and the person’s specific tax return. Nielsen said these factors determine how much tax the person will have to pay on this loan forgiveness.
He said Biden’s one-time cancellation will apply to about 95 percent of borrowers in Indiana.
Indiana does not tax all student loan forgiveness. For example, public service loan forgiveness is not treated as income.
Andrew VanSingel works with the Internal Revenue Service. After sharing a personal anecdote about loan forgiveness, he urged Hoosiers to keep proof of payments and correspondence with student loan servicers.
“You have to be your best advocate and you have to be diligent,” VanSingel said. “Keep documentation. You may need to, down the road, prove that payments were made and that conversations were had.”
READ MORE: You can now apply for Biden's student loan relief plan. Here's how
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To qualify for loan cancellation under Biden’s plan, borrowers must have federal student loans (private student loans remain ineligible). Additionally, there is a $125,000 income cap for individuals and $250,000 cap for those filing jointly or who are heads of household. The loan cancellation only applies to loan balances before June 30, 2022. This can relieve up to $10,000 for those with federal student loans, and up to $20,000 for those Pell Grant recipients.
The deadline to apply for Biden’s one-time loan cancellation is Dec. 31, 2023.
CLARIFICATION: For the purpose of clarity, we added that Indiana does not tax all student loan forgiveness the same way. For example, the state does not treat public service loan forgiveness as adjusted gross income.
CORRECTION: A previous version of our audio story said all federal student loan forgiveness would be taxed. That was incorrect. Our audio story has been updated to reflect that Indiana does not treat public service loan forgiveness as income.
Contact reporter Violet at vcomberwilen@wfyi.org or follow her on Twitter at @ComberWilen.