North Carolina residents will have to pay state taxes on federal student loan forgiveness, DOR says

CHARLOTTE — If you’re one of the millions of Americans getting a break from the Biden Administration’s new student loan forgiveness plan, be sure to sock some money away to pay the state government around tax time.

In August, the White House announced a plan to eliminate $10,000 of federal student loan debt for borrowers under certain income limits, with an additional $10,000 of forgiveness for borrowers who were eligible for Pell grants when they attended college. Applications are expected to open in early October, and many borrowers will get their student loan reductions automatically.

The North Carolina Department of Revenue said Wednesday that the state considers student loan forgiveness as taxable income. That means you could be paying hundreds of dollars or have your tax refund reduced by hundreds after you file your taxes.

According to the White House, student loan forgiveness will be excluded from federal tax income.

Why is North Carolina collecting taxes on the debt relief? That’s because the North Carolina General Assembly didn’t adopt a certain section of the Internal Revenue Code that would exclude student loan forgiveness from state income taxes.

“Student loan forgiveness excluded pursuant to IRC 108(f)(5) is currently considered taxable income in North Carolina,” the North Carolina Department of Revenue said Wednesday. You can see the state’s tax code, yourself, at this link.

North Carolina isn’t the only state that could be collecting income tax from the student loan forgiveness. According to the Tax Foundation, Arkansas, Minnesota, Mississippi, and Wisconsin also have tax policies in place that could lead to heftier tax burdens for borrowers.

The state has about 1.3 million borrowers, according to Student Loan Hero; if all of those residents have to pay a 4.99% state income tax on $10,000 in loan forgiveness, that would work out to about $650 million in additional revenues.

It’s not clear if the North Carolina General Assembly will modify the state’s revenue code to exempt student loan forgiveness, but the legislature does reconvene before tax bills are due next year. The Department of Revenue said it’s “monitoring any further enactments by the General Assembly that could change the taxability of student loan forgiveness in North Carolina.”

South Carolina won’t tax the relief as income, the South Carolina Department of Revenue said in a tweet on Sept. 1.

“To the extent a student loan described in IRC Section 108(f)(5) is forgiven for federal Income Tax purposes and excluded from federal taxable income, then the amount is also excluded from South Carolina taxable income,” the SCDOR said.

Borrowers have until the end of 2023 to file an application for federal student loan forgiveness, according to the White House.

(WATCH BELOW: How Biden’s student loan forgiveness plan could impact local graduates)

Andrew McMillan, wsoctv.com

Andrew McMillan is the Digital Content Manager for WSOC-TV.