Millions of Americans may not have to pay federal student loans anymore. But if you live in a state that has decided to tax forgiveness, you should prepare, experts say. 

Even though the Supreme Court struck down President Joe Biden’s broad student-debt cancellation plan, borrowers who were defrauded or misled by their colleges or had their payment counts adjusted had those debts forgiven. All those people are exempt from federal taxes on their forgiveness under the American Rescue Plan Act (ARPA).

Most states followed suit and didn't impose taxes on student loan cancellations. But in the handful that do plan to tax forgiveness, borrowers should get ready so they're not surprised this tax season or worse, face an audit. 

Which states will tax student debt forgiveness? 

Indiana, Mississippi, North Carolina and Wisconsin will tax the amount of your federal student loan forgiveness.

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Another state, Arkansas, is still deciding whether it will impose taxes on debt cancellation, said Garrett Watson, senior policy analyst at nonpartisan tax policy think tank Tax Foundation. “Arkansas will probably decide this year,” Watson said. “By fall, I imagine.” 

The last time Arkansas commented on its plans to tax student debt cancellation was in September 2022. At the time, it said it would levy a tax. But its General Assembly could change that plan. 

“I suggest folks in those states, well in advance of the end of the year, connect with a tax advisor or preparer to figure out how this can change your taxes,” said Lawrence Sprung, author of Financial Planning Made Personal and founder at financial planning firm Mitlin Financial.  Anyone who receives loan forgiveness should receive a 1099-C tax form.

How will these states tax student loan forgiveness? 

States will count the amount of forgiveness as income, Watson said. The amount of tax you pay will depend on what tax bracket you’re in once your total income is determined. 

The upside is that state income tax rates are usually much lower than federal ones, making the amount people owe on the debt cancellation more manageable than if taxed by the federal government, Sprung said.  

If you live in New York and have $10,000 forgiven and are in the 7% bracket, you’ll owe $700. “And some of that will get washed out (by not getting taxed) on the federal tax,” he said. 

Are there any exceptions in these taxing states? 

Possibly. Certain loan forgiveness programs that are not usually taxed at the federal level are often not taxed by states, as well. These programs niclude: 

• Public Service Loan Forgiveness (PSLF): If you work for qualifying nonprofit organizations, government agencies or public service groups full-time for 10 years and make 120 qualifying monthly payments, you may apply for debt cancellation. If approved, the government forgives the federal loan balance and none of it is taxable as income. 
• Borrower Defense to Repayment Discharge: Loans that get dismissed because a school has misled you or defrauded you aren't federally taxed. 
• Total and Permanent Disability Discharge: Borrowers who become totally and permanently disabled can get their loans forgiven. But whether the canceled amount is taxable depends on when you qualify for discharge. If you received a discharge in 2018 or later, the loan amount isn't subject to federal income taxes. However, this exemption will expire in 2025 and needs to be renegotiated, Watson said. 

Remember: “Tax implications of debt forgiveness and, more specifically, student loan debt forgiveness and taxation consequences are an ongoing process and very fluid,” said Mark Steber, chief tax information officer at tax preparer Jackson Hewitt, who adds it's important to talk with a tax expert. 

What if I qualify for student loan forgiveness in 2024 or 2025? 

If you receive student loan forgiveness in the next two years or so, you’ll be safe from federal taxes because ARPA, which exempts student loan cancellation from federal tax, doesn’t expire until the end of 2025.  

States that matched ARPA will likely keep forgiveness untaxed, while states that said they would keep taxing canceled amounts will continue to do so during this time, experts said. 

Mark your calendar:Student loan payments to restart soon as pause ends: Key dates to remember.

What happens after 2025? 

Since ARPA expires in 2025, both federal and state taxes on student loan forgiveness could resume unless exemptions are extended or tax laws changed, experts said. 

If things go back to normal, "after 2025, it’s important to understand what program you’re using to get your loans discharged because that is how you will be taxed post-2025,” Sprung said. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at[email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday.