Kentucky students will not have to pay taxes on loan forgiveness

Mark Payne
Mark Payne
Mark Payne is the government and politics reporter for LINK nky. Email him at [email protected]

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Kentucky student loan borrowers who receive loan forgiveness under President Joe Biden’s loan relief program will not have to pay taxes on their forgiven loans.

Some articles have recently said that student loan borrowers in certain states, including Kentucky, might have to pay income taxes on the student loan forgiveness program announced last week – but that’s not true, according to the Kentucky Department of Revenue. 

“Kentuckians eligible for federal student loan debt forgiveness will not pay state income taxes on savings realized under the Biden-Harris Administration’s Student Debt Relief plan,” said Jill Midkiff, the director of communications for the Kentucky Finance & Administration Cabinet. 

Under Biden’s student debt relief plan, student loan borrowers would have $10,000 in outstanding federal student loans relieved. In addition, students from low-income families that qualified for a Pell Grant would have their debt reduced by $20,000.

A significant number of Kentuckians may benefit from the decision, according to researchers in the state. 

“Our research shows that 616,000 Kentuckians have federal student loan debt,” said Ashley Spalding, the research director for the Kentucky Center for Economic Policy. “More than 209,000 of these borrowers owe $10,000 or less and can expect to have their balances wiped out entirely.”

A report by the Tax Foundation, a think tank that focuses on tax policies, showed that in some states, debt forgiveness would count as income and is taxable. A subsequent story in Bloomberg showed that student loan borrowers in 13 states could pay taxes. 

Tax Foundation Vice President Jared Walczak, who focuses on tax policy, calculated the maximum tax amount for $10,000 loan forgiveness. In Kentucky, it showed that borrowers could have been potentially hit with a maximum tax of $500. 

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But, after the last legislative session, the Kentucky Legislature adopted language under the American Rescue Plan Act into the revenue code that says that forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income. 

“Under tax law changes that the Governor signed after passage by the 2022 General Assembly, student loan debt cancellation is exempt from Kentucky income tax,” Midkiff said. 

House Bill 659 contained language that instituted the revenue code changes into House Bill 8, the bill that it set to decrease the income tax in Kentucky.

“The 2022 Kentucky law change adopted the federal changes enacted in 2021 applicable to student loan debt forgiveness for individual income tax returns for periods beginning on or after 1/1/22 and before 12/31/2025,” Midkiff said.

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