Student Loan Forgiveness in NY Would Be Formally Exempt from State Taxes Under New Bill

Student loan forgiveness would be formally exempt from state taxes in New York under a new bill introduced in the state Legislature.

While the state Department of Taxation and Finance has said the agency had no plans to tax that relief, lawmakers said they wanted to codify that promise into state law.

“New York State shouldn’t receive a windfall on the backs of low and middle-income student borrowers,” said Sen. Brad Holyman, D-Manhattan. “Student loan debt is crushing an entire generation of students, and New York must do its part in combating this crippling crisis.”

After President Biden announced his plan to forgive student loan debt for borrowers who make less than $125,000 a year, Hoylman introduced the bill with Senate Deputy Leader Michael Gianaris and Sen. Kevin Thomas. It’s called the “Tax-Free Debt Forgiveness Act.”

The United States Department of Education will relieve $20,000 for students who received the Pell Grant and $10,000 for students who did not yet the forgiven amount is still tax-eligible income in six states. 

Though Internal Revenue Codes before 2021 recognized debt relief as taxable income and standard taxation practice, the American Rescue Plan Act of March 2021 excluded student loan forgiveness as federal taxable income from 2021 to 2025.

States can adopt the ARPA into their state tax bases; it is not a requirement. Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin are taking full advantage of their rights to tax canceled student loan debt.

According to an early Tax Foundation analysis, New York was thought to be on the brink of following suit until Senators Gianaris, Hoylman and Thomas endeavored to permanently remove student loan relief from taxation. 

“Codifying exemptions that clarify forgiven loans are not subject to State taxes prevents confusion and will protect eligible borrowers from being penalized for receiving this needed - and important relief from the U.S. Department of Education,” Thomas said.

The bill won’t be considered until January at the earliest, when lawmakers return to Albany for the new legislative session. That runs through June.

To learn more about why certain states have chosen to tax student debt relief and how they can engage the IRC and the ARPA, click here to read the Tax Foundation’s analysis of the subject.