Hoosiers participating in the federal student loan forgiveness program currently are required to pay state and county income tax on the value of their eliminated debt.

A 2021 Indiana law mandates the total amount of forgiven student loan payments, which are exempt from federal income tax, be counted the same as earned income when it comes to calculating an Indiana resident's state and local income tax obligations.

That means if the loan forgiveness plan proposed by Democratic President Joe Biden goes through this year, a Hoosier who gets $10,000 in student loan debt wiped off the books still will have to pay 3.23% of that amount, or $323, as income tax to the state of Indiana.

Pell Grant recipients who are eligible for up to $20,000 in student loan forgiveness likewise will owe 3.23% of the forgiven amount, or a maximum of $646, to the state.

Though should student loan forgiveness not go through until 2023, the amount owed to the state will decline slightly because Indiana's income tax rate is dropping to 3.15% on Jan. 1.

At the same time, Indiana counties impose their own income tax obligations for which forgiven student loan debt also would count as earned income subject to tax.

The income tax rate in Lake County is 1.5%. As a result, a Lake County resident with $10,000 in forgiven student loan debt will owe an additional $150 in county income tax, on top of the $323 extra they'll pay in state income tax.

In Porter County, the income tax rate is 1.25%. It's 0.95% in LaPorte County, 1% in Newton County and 2.864% in Jasper County.

The obligation to pay state and county income tax on earnings not subject to federal tax is relatively unusual since Indiana generally conforms its tax statutes to match federal law for simplicity, among other reasons.

In this case, a paragraph tucked into page 118 of the 234-page, two-year state budget, signed into law April 29, 2021, by Republican Gov. Eric Holcomb, decoupled Indiana from the tax exemption for forgiven federal student loan debt included in the American Rescue Plan Act (ARPA) enacted by Biden March 11, 2021.

Ironically, even though Statehouse Democrats almost uniformly vote against the budgets proposed by the Republican-controlled House and Senate, nearly every Hoosier lawmaker supported House Enrolled Act 1001, including the provision requiring state taxation of forgiven student loan debt, because the budget included billions of dollars in extra spending for schools and other state needs made possible by ARPA.

State Rep. Greg Porter, D-Indianapolis, the top Democrat on the budget-writing House Ways and Means Committee, said Tuesday he now is planning, when the General Assembly convenes in early January, to propose retroactively eliminating the collection of state and county income tax on forgiven student loan debt.

Porter said that with Indiana boasting a $6.1 billion budget reserve it would be "unfair and needlessly counterproductive" to count Hoosiers' forgiven debt as earned income and compel them to pay income tax on the amount.

"I can't say I'm surprised Indiana has chosen to take a punitive stance on a policy meant to give working-class Americans relief, but there's still time to change this," Porter said.

"Many student borrowers have paid back their original loan amount and then some, but interest rates have kept them from paying off their debt and allocating that money toward buying a house, saving for retirement or starting a family. The federal government and the vast majority of other states have correctly chosen not to tax student debt forgiveness," he added.

The U.S. Department of Education is expected to put out its debt forgiveness application in October. Porter said approximately 900,000 Hoosiers earning less than $125,000 a year, or $250,000 for a married couple, will be eligible to have some or all of their federal student loan debt forgiven.

However, a coalition of Republican state attorneys general, likely including Indiana's Todd Rokita, is expected to file a federal lawsuit in the weeks ahead trying to stop the loan forgiveness program from going through.

U.S. Sen. Todd Young, R-Ind.; U.S. Sen. Mike Braun, R-Ind.; and Jennifer-Ruth Green, the Republican candidate seeking to represent Northwest Indiana in the U.S. House, also oppose Biden's student loan forgiveness program.

© Copyright 2022, nwitimes.com, Munster, IN