State exempts canceled student loans

HARRISBURG » Pennsylvania will no longer impose state income taxes on public sector workers and nurses who receive student loan forgiveness from two major programs, the Wolf administration announced Friday.

The change impacts participants in the federal Public Service Loan Forgiveness Program, which provides debt relief to teachers, social workers, military members and other public servants, and the Pennsylvania Student Loan Relief for Nurses Program, a recent pandemic-era initiative to forgive up to $7,500 in student loan debt incurred by state-licensed nurses.

Most other states and the federal government do not subject student loan forgiveness to taxation, but state lawmakers who pushed for the change said the state Department of Revenue had considered canceled student loans to be taxable income. That meant that a Pennsylvania resident who owed $50,000 in student loans would be subject to a $1,535 state tax bill once that debt was forgiven.

“These people have chosen to serve the public, and often in lower-paying fields, because they want to make a difference. They don’t have thousands of dollars lying around to pay a onetime tax bill. So it’s wrong to take what should be a blessing and turn it into just another burden,” Gov. Tom Wolf said.

The Department of Revenue sent a bulletin on Friday to clarify that student loan forgiveness through the two programs would not be subject to state taxes.

Created in 2007, the Public Service Loan Forgiveness Program promises that college graduates who take jobs in public service or who work for nonprofit organizations can have their federal student debt forgiven after making 10 years of monthly payments. The Biden administration recently eased eligibility rules after the program was criticized for rejecting more than 90% of applications.