Thousands of Hoosier borrowers with student loan debt discharged under a presidential proposal could see their taxable income increase under Indiana law.
The loan forgiveness, announced in late August by President Joe Biden, waives up to $10,000 for borrowers earning less than $125,000 or couples earning less than $250,000. Borrowers who qualified for Pell Grants while in school are eligible for another $10,000 discharge.
But Indiana tax law requires Hoosiers to report that discharge of debt as income, meaning some could pay over $1,000 in taxes.
Rep. Greg Porter, the ranking Democrat on the House Ways and Means Committee, decried the law, vowing he would file legislation to mitigate the impact and retroactively waive the tax.
“Many student borrowers have paid back their original loan amount and then some, but interest rates have kept them from paying off their debt and allocating that money toward buying a house, saving for retirement or starting a family,” Porter, D-Indianapolis, said in a statement. “… taxing student debt relief when we have a $6.1 billion and growing surplus is unfair and needlessly counterproductive.”
The Education Data Initiative reports that 906,500 student borrowers live in Indiana, with a combined $29.8 billion in debt – around $32,874 per borrower. An estimated 294,000 of those borrowers saw their debt completely wiped out by the executive order.
The Department of Revenue confirmed that the student debt forgiven would be taxable and included in Hoosiers’ adjusted gross income. A statement from the agency said that only the General Assembly could change the law.
According to the department, Hoosiers will pay up to $323 for $10,000 forgiven or up to $646 for $20,000 at Indiana’s 3.23% tax rate. However, some counties charge an additional tax rate, including Marion County, which has a 2.02% tax rate, charging $202 for $10,000 in forgiveness or $404 for $20,000. To see the tax rates of other counties, visit the agency site.
The nonprofit Tax Foundation lists at least five other states that will tax the discharged debt for their residents, including Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin. Some other states have already moved to waive taxes for student loan borrowers who qualified for forgiveness and federal taxes will not apply at all.
“The federal government and the vast majority of other states have correctly chosen not to tax student debt forgiveness. I can’t say I’m surprised Indiana has chosen to take a punitive stance on a policy meant to give working-class Americans relief, but there’s still time to change this,” Porter said in a statement. “In the meantime, however, I urge all Hoosiers with federal student loans to stay vigilant and not forget that this debt relief will currently be considered income and thus tax-liable in our state.”
House Speaker Todd Huston, R-Fishers, did not give a specific answer when asked by the Indiana Capital Chronicle whether the GOP caucus would act in the 2023 session. If the loans are forgiven in 2022, they would need to be reported with their 2022 tax filings, meaning legislators would need to act quickly when they convene in January.
“We’re aware of the issue and I expect for conversations to continue as we head into the next legislative session,” Huston said in a statement.
The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.