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If you live in Colorado, Connecticut, Massachusetts, Pennsylvania or one of 10 other states and have student loans that are canceled because they are preventing you from living your life, you may owe a hefty state tax bill.

Some income-driven repayment plans like Income-Based Repayment (IBR) will forgive your remaining balance after 20 to 25 years. But if you live in a state with a high earnings tax rate at the time of forgiveness — such as Pennsylvania with its 7.99% tax rate or Connecticut with its 9.9% tax rate — the forgiven loan amount may have to be considered taxable income.

The federal government sets the standard that all states must follow when calculating a borrower’s taxable income, but it doesn’t control state taxes. That’s why each state has its own rules, and those vary dramatically. In some states, you’ll owe no state income tax on the forgiven debt, but in other states you may owe thousands of dollars in state taxes.

You can find out whether this applies to you by visiting the Department of Education’s Student Loan Forgiveness website, which displays a map of your state’s tax rules. The website is not as user-friendly as it could be, but it does offer an easy way to determine whether your loan amount is taxable according to your individual state’s rules.

If you live in one of the 13 states where borrowers may owe state income tax, your ability to pay off your student loan debt may become more remote. If an individual owes $10,000 in student loan debt after forgiving their loans under an income-driven plan, the median annual state and local tax bill is $1,100. With a 10% down payment on a $25,000 home in Chicago and a 25 year fixed rate at 4.

It is possible to refinance student loans with a private lender after getting your loans forgiven by the federal government. However, if you live in a state where your remaining balance is considered taxable income, that may not be an option. You could be prevented from refinancing or consolidating in order to avoid the state income tax liability.* You could even lose an opportunity to buy a home at all.

For decades student loan borrowers have complained about the lack of transparency in the student loan repayment process and the inability to determine the full cost of their loans until after they have committed. As this situation with state income taxes on forgiven loans shows, it’s time for the Department of Education to get serious about providing clear, consistent information to all borrowers.

To avoid the high state income taxes, a borrower could refinance their loans with a private lender. But if they live in one of the states where they will owe thousands of dollars in state income tax, that is not an option. This would leave borrowers unable to continue paying off their student loan debt in order to purchase a home or maintain their current standard of living.

Sharon Hollander is an attorney who teaches bankruptcy and debt restructuring at the University of Colorado Law School and a student loan expert.

Title: State Tax Department Warns Taxpayers Over Forgiven Student Loan Debt.

Living in one of the 13 states that taxes forgiven student loan debt was bad enough, but now taxpayers across the country have to contend with state tax departments warning them about the tax liability.

It’s tough to be a student loan borrower in the United States. Not only are you likely mired down in $33,000 in debt after four years of college, you’re probably still paying it off at an interest rate that is almost double what your credit card carries. In addition to all this, you might have to pay up big time for student loans that are forgiven under an income driven repayment plan.

If you are a former student who has had the opportunity to have their federal student loan debt forgiven, there’s a chance that the state and federal government might take a nice chunk of your money. This is because each state has its own rules and regulations concerning what constitutes taxable income, so it is possible that some states will tax forgiven student loan debt.

Income-Driven Plans:

Right now there are only 13 states that have laws on the books regarding what is considered taxable income. The remaining states have a tax rule that simply exempts forgiven debt from being taxable as income. However, any state can make changes to its laws at any time.

Current Tax Laws:

• Alabama–Non-taxable Income: Any canceled student loan debt for Alabama residents is non-taxable income.
• Arkansas–Non-taxable Income: Any canceled student loan debt for Arkansas residents is non-taxable income.
• Colorado–If you live in Colorado and your income-driven plan was created on or after July 1 of 2014, any forgiven loan amount is considered taxable. If your income-driven plan was created before July 1 of 2014, then you will not have to pay state taxes on forgiven loan amounts.
• Connecticut–Any canceled student loan debt for Connecticut residents is considered taxable income.