LITTLE ROCK, Ark. – Following President Biden’s student loan forgiveness plan, millions of Americans will soon have $10,000 of student loan debt wiped away. Borrowers in Arkansas may see a higher tax bill because of it.
Arkansas is one of 13 states where borrowers would have to pay about $550 on state taxes. At the federal level, the $10,000 dollars of forgiveness will not be taxed. Arkansas has its own tax code and there is no provision for debt cancellation which makes it taxable income.
“If things don’t change, there will be an additional tax hit. Now that may be a trade if you were asked if you’d take it you would. You’d say ‘sure for 10,000 dollars of student loan debt cancellation yes I’ll pay 550 dollars to Arkansas.’ None the less it could be a surprise and you don’t want this to come as a surprise,” Tax Foundation State Projects President Jared Walczak said.
Walczak said for it to change, it would require a legislative fix and lawmakers have a very narrow window to get it done.
“Taxes need to be filed by April and many people are filing them earlier than that so if the change is not made quickly enough you would have to either find some way to refund people or have to deal with a raft of amended returns,” Walczak said. “That’s not what the state wants to do. It’s not what taxpayers want to do.”
Walczak says it’s important borrowers are aware of this so it’s not a surprise when they start doing their returns next year.