Will You Owe State Taxes on Forgiven Student Loans in 2025?

Student loan forgiveness: it sounds like a dream come true, right? You’re finally free from those monthly payments weighing down your wallet, your mental health, and your weekend plans. But and there’s always a “but” the question lurking in the background is this:

“Do you pay taxes on forgiven student loans?”

If you are one of the millions of Americans wondering about how student loan forgiveness goes with taxation in 2025, you’re at the right place. Let’s make it perfectly clear, casually discussed, without all the confusing IRS jargon. Sound good? Let’s go.

Student Loan Forgiveness and Taxes: The Basics

Here’s the big question everyone’s asking:
Is student loan forgiveness taxable?

At the federal level, the good news is: no at least for now.

Because of the American Rescue Plan Act (or ARPA) enacted in 2021, student loan forgiveness provided it is forgiven up until the end of 2025 is not regarded as taxable income on the federal level. So, if your loans got forgiven this year, the IRS will not come looking for income taxes on those sums.

Cue the sigh of relief!

But before you pop the champagne, there’s a catch (because of course there is): your state may still tax it. And this is where things get a little murky.

So, How Does Student Loan Forgiveness Affect Taxes in 2025?

Think of your forgiven loan as money you would have owed but now don’t. The government sometimes treats that as a financial benefit – a.k.a. taxable income.

At the state level, not every place follows federal rules. Some states conform to the IRS tax code automatically, while others do their own thing. That means you could be living in a state where forgiven student loans are treated like a winning lottery ticket… and yes, taxed accordingly.

This brings us to the key question:

Which states tax student loan forgiveness in 2025?

Let’s dig into it.

States That Might Tax Forgiven Student Loans

As of mid-2025, the majority of states follow the federal rule and do not tax forgiven student debt. But a handful of states are either undecided or explicitly plan to tax the forgiven amount.

Important: State tax policy can undergo rapid changes. Some states enjoy a limbo period, and others work out updates in their tax code, so it is advisable to always check with a local CPA or their local Department of Revenue website.

Here are some states to watch:

Again, these are subject to change. And this is why it’s worth staying alert to student loan forgiveness tax implications at the state level even if you’re safe from Uncle Sam’s clutches.

Do You Pay Taxes on Forgiven Student Loans?

Let’s clarify the two-layer system:

• Federally: Student loan forgiveness is tax-free through 2025.
• Statewise: It depends entirely on where you live. If your state taxes forgiven debt, you could owe hundreds or even thousands.

For example, if you live in Indiana, and your $20,000 loan is forgiven, you might owe $1,000–$1,200 in state taxes, depending on your state’s tax rate.

Surprise tax bill? Not the kind of mail anyone wants.

Why Do Some States Still Tax It?

You’d think they’d just copy the federal playbook, right? But many states have their own unique tax codes and don’t automatically conform to IRS changes.

Some states require a legislative vote to adopt tax updates and sometimes, that vote gets stuck in political quicksand.

Others argue that forgiven student loans should be taxed, just like any other canceled debt (like forgiven credit card balances or mortgage relief). It’s a fiscal philosophy thing.

But from the average borrower’s perspective? It just feels like being taxed on a break you waited years for.

What Is “Student Loan Forgiveness Taxable Income”?

When a debt is forgiven, the IRS often considers it as “cancellation of debt income” (COD income, if we’re being formal). That’s why in normal circumstances, forgiven loans count as income you’re being “gifted” that amount, even though no one actually hands you the cash.

But under ARPA, this sort of income was made tax-exempt for a while.

So, barring any extensions from Congress (which may not happen), the federal tax-free status of forgiveness shall cease by 2025.

After that? Buckle up. Forgiveness could be taxable everywhere again.

What Should You Do Now?

Let’s keep it practical. Here’s what you can do today to avoid nasty surprises:

1. Check Your State’s Policy

Look up “[Your State] + student loan forgiveness tax 2025.” Or better yet — ask your accountant directly.

2. Budget for the Worst-Case

If you live in a maybe-taxing state, set aside 5%–7% of your forgiven amount, just in case. Better safe than blindsided!

3. Monitor IRS and Congressional News

Remember: the federal exemption expires in 2025. If Congress doesn’t extend it, everyone could owe taxes in 2026.

4. Talk to a Tax Pro

Seriously. If you’re getting $10,000–$20,000 (or more) forgiven, it’s worth spending a little to have someone walk you through your exact obligations.

Final Thoughts

Student loan forgiveness feels like a win and for many, it is. But tax laws have a way of turning good news into question marks. The student loan forgiveness tax implications in 2025 depend heavily on where you live, how your state handles taxable income, and whether Congress decides to keep the federal tax exemption going.

So… will you owe state taxes on forgiven student loans in 2025?
Maybe. And if you do, you’ll definitely want to be ready.

Because while loan forgiveness is a financial breather, a surprise tax bill? That’s just bad karma.