Police & Fire

State delays decision on student loan forgiveness tax status until 2023

By ANTOINETTE GRAJEDA | Arkansas Advocate

A decision on whether student loan forgiveness will be taxable in Arkansas will have to wait a few more months. 

Last week, Arkansas officials said they had not yet decided if canceled student debt could be taxed. Following the release of President Joe Biden’s student loan forgiveness plan, the Tax Foundation reported Arkansas was one of 13 states that could potentially tax canceled debt. 

The forgiveness of a debt is generally included in a taxpayer’s gross income; however, Gov. Asa Hutchinson and the Arkansas General Assembly took action to exempt unemployment payments from state income tax for a two-year period, said Scott Hardin, spokesperson for the Arkansas Department of Finance and Administration. 

Additionally, pandemic-related Paycheck Protection Program loans are not subject to state income tax because of legislation. The General Assembly meets in January and may take similar action to exempt student debt forgiveness, Hardin said. 

“It would be inaccurate to report student loan forgiveness will be taxable in Arkansas as we won’t be certain until the legislative session is complete and the complete details of the loan forgiveness plan are finalized and announced by the U.S. Department of Education,” he said.

The 2023 legislative session is scheduled to begin Jan. 9.

Hutchinson called the student loan forgiveness plan “a misuse of executive authority” in a statement.

“Shifting the burden from those who willingly took out a loan to all taxpayers is inconsistent with the American ideal of personal responsibility and will further discourage those who took a different path, including work or lower-cost schools,” he said. “If President Biden wanted to provide relief to Americans with student loan debts, he could work to permanently lower interest rates instead of across-the-board forgiveness.” 

Forgiving student loans will “reward high-cost schools and add to the inflated cost of higher education,” Hutchinson added.

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. 

Through Biden’s plan, the U.S. 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

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  1. I have no problem with taxing this loan forgiveness, it is income, after all. What I do have an issue with is our legislature waiting until after the midterm elections to state that they will tax it — something we all know they plan to do, just to try to sway a few votes from those affected.

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