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Some states will tax student loan forgiveness. Ohio isn’t one of them

Written on Sep 9, 2022

North Carolina and Mississippi say they will likely apply state tax to student loan forgiveness for their state residents. And a handful of other states are looking into doing the same. But Ohio isn't one of them. 

The Ohio Department of Taxation announced Ohioans who receive federal student loan forgiveness won’t have to worry about paying state taxes on it. Under current Ohio law, the federal student loan forgiveness is not taxable. 

President Biden announced a plan to allow federal student loan borrowers to receive up to $10,000 in loan forgiveness as long as they don’t earn more than $125,000 a year. Borrowers who had Pell Grants while attending college could have up to $20,000 worth of their loans forgiven. The Biden administration's student loan forgiveness plan is exempt from federal tax. 

How states apply the taxability of this student loan forgiveness has to do with the way they deal with the federal American Rescue Plan Act (ARPA). The Tax Foundation, an independent non-profit tax policy organization, said as a general rule, a discharge of indebtedness counts as income and is taxable. But because of ARPA, that's not necessarily the case with this student loan forgiveness plan. The organization issued a statement saying, "Under § 9675 of the American Rescue Plan Act (ARPA), however, the forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income. States which follow the federal treatment here will likewise exclude debt forgiveness from their own state income tax bases. But, for a variety of reasons, not every state does that. There are at least six relevant interactions with the Internal Revenue Code (IRC) for purposes of the treatment of student loan debt cancellation." 

The U.S. Department of Education reports the average student loan balance in Ohio is $34,923. And it says there are 1,776,400 federal student loan borrowers in Ohio who altogether owe $62.6 billion.