A borrower who spent a decade teaching in North Carolina public schools, making 120 qualifying payments to earn Public Service Loan Forgiveness, will owe the IRS nothing when $50,000 in student debt disappears from her balance. But when she files her state return this year, that same $50,000 could show up as taxable income, generating a bill of roughly $2,500. North Carolina is one of at least seven states that have not clearly aligned their tax codes with the longstanding federal provision that shields PSLF from taxation, and two additional states have muddied the picture by exempting PSLF while taxing other forms of forgiveness.
For the more than one million borrowers who have received PSLF discharges since the Department of Education began its program overhaul in October 2021, according to Federal Student Aid, the federal picture is settled. Under IRC Section 108(f)(1), loan amounts forgiven through qualifying public service employment are permanently excluded from gross income. No sunset date. No phase-out. But the state picture is messier, and borrowers heading into the 2026 filing season need to know exactly where they stand.
How the federal exclusion works
PSLF requires 120 qualifying monthly payments while working full-time for an eligible employer, typically a federal, state, or local government agency or a qualifying 501(c)(3) nonprofit. Once those payments are complete, the remaining loan balance is discharged. The IRS does not treat that discharged amount as income, thanks to a provision Congress added to the tax code in 1984.
This permanent exclusion is distinct from the temporary, broader shield Congress created through the American Rescue Plan Act of 2021. That provision, codified at IRC Section 108(f)(5), covered all forms of student loan forgiveness, including income-driven repayment discharges, and kept them off federal tax returns through December 31, 2025. With that temporary provision now expired, borrowers whose loans are forgiven in 2026 under income-driven plans like SAVE, IBR, or ICR will once again owe federal income tax on the discharged amount. PSLF recipients are the notable exception: their permanent exclusion under Section 108(f)(1) remains fully intact.
Nine states where the tax treatment is not straightforward
State tax codes do not automatically mirror every federal provision. Each state decides independently whether to conform to specific sections of the Internal Revenue Code, and those decisions create a patchwork that catches borrowers off guard. Based on guidance from state revenue departments and conformity analyses published by the Tax Foundation, nine states have not fully or clearly exempted all forgiven student loan balances from state income tax as of May 2026:
- North Carolina – has not published guidance exempting PSLF
- Mississippi – has not published guidance exempting PSLF
- Arkansas – has not published guidance exempting PSLF
- West Virginia – has not published guidance exempting PSLF
- Minnesota – has not published guidance exempting PSLF
- Alabama – has not published guidance exempting PSLF
- Pennsylvania – has not published guidance exempting PSLF
- Indiana – exempts PSLF but taxes forgiveness under the expired ARPA provision
- Wisconsin – exempts PSLF but may tax other forms of forgiveness
The distinctions matter. Indiana and Wisconsin have published program-specific guidance confirming that PSLF itself is not taxable at the state level. But both states treat other types of forgiveness differently, which means borrowers with mixed discharge histories or those who received forgiveness under a different program need to pay close attention. The remaining seven states have either decoupled from the relevant federal provisions or simply have not addressed the question publicly, leaving PSLF borrowers without a clear answer.
States with explicit guidance
A handful of states have published program-level positions that borrowers can actually rely on when filing.
The Wisconsin Department of Revenue states that PSLF forgiveness is not taxable for state purposes, citing the same IRC Section 108(f)(1) exclusion that applies federally. Wisconsin draws a clear line between PSLF and other types of discharge that may be treated differently under state law.
Indiana’s Department of Revenue takes a similar position on PSLF, confirming it is not subject to state income tax. However, Indiana requires borrowers whose loans were discharged under the ARPA-era exclusion (IRC Section 108(f)(5)) to add that forgiven amount back to Indiana adjusted gross income. This split treatment illustrates just how granular state conformity decisions can be.
North Carolina sits at the opposite end. The state’s Department of Revenue issued a press release in August 2022 declaring that student loan forgiveness excluded under IRC Section 108(f)(5) is taxable income for state purposes, citing N.C. Gen. Stat. Section 105-153.5(c2)(22). That statement was issued in response to the Biden administration’s broad forgiveness proposal and focused on the ARPA-era provision. North Carolina has not published separate guidance clarifying whether the older, permanent PSLF exclusion under Section 108(f)(1) applies at the state level, leaving borrowers without a definitive answer.
What borrowers still don’t know
For the remaining states on the list, official revenue department statements with statutory citations are either absent or buried deep enough in public records that most borrowers will never find them. That gap between widely repeated claims and verifiable, filing-ready guidance is the core problem.
Several practical questions remain unresolved:
- Enforcement: No state revenue agency has published data on how many PSLF recipients live within its borders, how much additional revenue it expects to collect, or how it plans to identify affected filers.
- Legislative movement: It is unclear whether any of the seven states without PSLF-specific guidance are actively considering bills to align with the federal exclusion before the next filing deadline.
- Program-level distinctions: Some states, like Indiana, treat PSLF and ARPA-era forgiveness differently. Others have not spelled out whether the permanent 108(f)(1) exclusion applies at the state level, even when their public statements focus exclusively on the temporary 108(f)(5) provision.
The dollar amounts are not trivial. A borrower with $80,000 in forgiven PSLF debt living in a state with a 5% income tax rate could face a state bill of $4,000, even though the IRS considers that same amount completely nontaxable. For public servants who accepted lower salaries specifically to qualify for forgiveness, an unexpected four-figure tax bill undercuts the program’s core promise.
Three steps PSLF borrowers should take before filing
Borrowers who received PSLF forgiveness in 2025 or early 2026 should act before filing their state returns:
- Check your state’s Department of Revenue website for program-specific guidance on student loan forgiveness. Look for references to IRC Section 108(f)(1), the permanent PSLF exclusion, not just the expired ARPA-era 108(f)(5) provision.
- Set aside funds for a potential state tax bill if you live in one of the seven states that have not published clear guidance exempting PSLF. A rough estimate: multiply your forgiven balance by your state’s top marginal income tax rate.
- Consult a tax professional familiar with your state’s federal conformity rules. The interaction between federal and state provisions is technical enough that general online advice, including this article, may not cover every wrinkle in your situation.
Why this gap persists for public servants
The federal protection for PSLF is unambiguous and has been in place for four decades. But state legislatures move on their own timelines, and student loan tax conformity has not been a priority in most statehouses. Until every affected state either conforms to the Section 108(f)(1) exclusion or publishes clear guidance explaining its position, borrowers who spent years earning forgiveness through public service face one more task: figuring out whether their state considers that relief tax-free or treats it as income. For a program designed to reward public service, that remaining uncertainty is a policy failure borrowers should not have to navigate alone.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
