What do Hoosiers need to know about Indiana’s taxation of student loan forgiveness?

Indiana is one of four states that taxes student loan forgiveness. This will include President Joe Biden’s recent one-time cancellation of student loan debt for eligible borrowers.

Officials in Indiana are urging borrowers to be cognizant of any taxes on their payments.

Andy Nielsen is a senior policy analyst for the Indiana Community Action Poverty Institute. He is urging Hoosiers to pay on time as much as they can.

“The advice we give to people is to file on time and to pay as much as you can by the deadline,” he said.

Nielsen pointed to underpayment fees that can exist if Hoosiers do not pay these taxes.

“If you live in a county that has a higher income tax and you’re above that $1,000 threshold, you start being subject to underpayment penalties by the Indiana Department of Revenue,” he said.

Taxes on forgiveness are treated like income tax – local income taxes vary by county and the person’s specific tax return. Nielsen said these factors determine how much tax the person will have to pay on this loan forgiveness.

He said Biden’s one-time cancellation will apply to about 95 percent of borrowers in Indiana.

Andrew VanSingel works with the Internal Revenue Service. After sharing a personal anecdote about loan forgiveness, he urged Hoosiers to keep proof of payments and correspondence with student loan servicers.

“You have to be your best advocate and you have to be diligent,” VanSingel said. “Keep documentation. You may need to, down the road, prove that payments were made and that conversations were had.”

READ MORE: You can now apply for Biden's student loan relief plan. Here's how

Join the conversation and sign up for the Indiana Two-Way. Text "Indiana" to 73224. Your comments and questions in response to our weekly text help us find the answers you need on statewide issues.

To qualify for loan cancellation under Biden’s plan, borrowers must have federal student loans (private student loans remain ineligible). Additionally, there is a $125,000 income cap for individuals and $250,000 cap for those filing jointly or who are heads of household. The loan cancellation only applies to loan balances before June 30, 2022. This can relieve up to $10,000 for those with federal student loans, and up to $20,000 for those Pell Grant recipients.

The deadline to apply for Biden’s one-time loan cancellation is Dec. 31, 2023.

Contact reporter Violet at vcomberwilen@wfyi.org or follow her on Twitter at @ComberWilen.