Arkansas officials: No determination yet on tax liability for student loan forgiveness

Arkansas tax authorities haven’t yet decided whether borrowers must pay state income tax on canceled debt under President Joe Biden’s student loan forgiveness plan.

Discharged debt is typically taxable as income. However, under the American Rescue Plan Act, student loan forgiveness between 2021 and 2025 is not subject to federal taxes.

 Arkansas is one of 13 states that could potentially tax the canceled debt, according to the Tax Foundation. 

While many states automatically adopt federal level tax changes, Arkansas does not, said Scott Hardin, Arkansas Department of Finance and Administration spokesperson. 

“An executive order from the president to cancel student loan debt is a new scenario,” Hardin said. “As a result, our Revenue Division is reviewing this issue and will soon announce whether canceled student loan debt is subject to state income tax.

“It is simply a matter of whether canceled student loan debt is considered taxable income under existing state law.”

Legislative action would be required if the finance department determines the forgiven debt is taxable income and if there is a desire to match the federal tax exemption for the debt, Hardin said.

There is precedent for updating the state’s tax code to match federal law. For example, in February 2021, the General Assembly approved House Bill 1361, which amended state law to make COVID-19 relief programs like the Paycheck Protection Program exempt from state income tax. The bill became law Mar. 2, 2021. 

The Tax Foundation, an independent tax policy nonprofit, estimates an Arkansan who receives $10,000 in student loan debt relief could pay a maximum of $550 in taxes.

That estimate did not come from the Arkansas Department of Finance and Administration, Hardin said. 

“I am not certain how that figure was developed,” he said. “We have not released any projections.”

DFA will release a statement on whether the forgiven loans are subject to state income tax when it makes a ruling.

Approximately 390,000 borrowers live in Arkansas, and $13 billion in student loan debt belongs to state residents, according to a report released by the Education Data Initiative in April. The average student loan debt in Arkansas is $33,333 and nearly 18% of the state’s borrowers owe less than $5,000. 

Last week President Biden announced the Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 in debt relief to non-grant recipients. Eligible borrowers must have an income of less than $125,000 for individuals and $250,000 for married couples. 

More information about the plan is available here.