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Arkansas generally taxes forgiven student loans as income. Most income-driven repayment (IDR) forgiveness is now federally taxable too, because the federal tax exclusion expired on December 31, 2025.
PSLF and debt discharged in bankruptcy should stay tax-free in Arkansas. A death or disability discharge in 2026 or later may be taxed by Arkansas even though it’s federally tax-free.
Lawmakers could exempt forgiven loans, but no changes have been made yet. Be prepared for a tax bill unless that happens.
Overview
Arkansas student loan forgiveness tax rules could catch you off guard. The federal exclusion that made most forgiven student loans tax-free expired on December 31, 2025, so IDR forgiveness in 2026 or later is federally taxable again. Arkansas never adopted that temporary exclusion and generally taxes forgiven loans as income. That means relief from student loan forgiveness could leave you with a state tax bill on top of a federal one.
Here’s what that looks like: the state bill depends on your total income that year and Arkansas’s graduated income tax rates, which have changed more than once in recent years, so check the current rates before you run the numbers. The lawmakers actually have the power to change this, like they did for unemployment benefits and PPP loans. But they haven’t stepped up yet.
Don’t let this trip you up. We’ll walk you through what you need to know and what you can do next to avoid surprises.
How Much Could You Owe in Taxes on Forgiven Loans?
If you’re receiving student loan forgiveness, whether Arkansas taxes it depends on how the loan was forgiven. Arkansas writes its own definition of income and adopts only some federal tax rules, as of fixed dates, so its treatment of canceled debt doesn’t always match the federal treatment:
IDR forgiveness: Generally taxable in Arkansas. For forgiveness in 2026 or later, it’s federally taxable too.
PSLF and other forgiveness earned by working in certain jobs: Should stay tax-free. Arkansas adopted the federal exclusion for loans forgiven in exchange for working in certain professions, which covers Public Service Loan Forgiveness and Teacher Loan Forgiveness.
Bankruptcy and insolvency: Debt discharged in bankruptcy should stay tax-free, and canceled debt can be excluded to the extent you were insolvent when it was canceled. Arkansas adopted both federal exclusions.
Death or total and permanent disability discharge: Federally tax-free, but a discharge in 2026 or later may be taxable in Arkansas, because the version of the federal exclusion Arkansas adopted covers only discharges before 2026.
If your forgiveness is taxable, Arkansas adds it to your income for the year it’s forgiven, and on a large balance the state bill can run into the thousands of dollars. Lower-income earners may owe less thanks to Arkansas’ tiered tax system. We’re not tax advisors, so confirm how your forgiveness will be treated with a tax professional or the Arkansas Department of Finance and Administration before it’s granted.
Can Arkansas Change Its Tax Policy on Student Loan Forgiveness?
Yes, Arkansas lawmakers can choose to exempt student loan forgiveness from state income taxes. The state Legislature has done this before for other types of forgiven debts, like Paycheck Protection Program (PPP) loans and unemployment benefits during the pandemic.
Currently, Arkansas operates under a “selective conformity” tax system, meaning the state doesn’t automatically follow federal tax changes. For IDR forgiveness to be tax-free in Arkansas, the Legislature would need to pass a law explicitly exempting it.
While it’s possible, no action has been taken yet. Lawmakers meet regularly, and this issue could come up in future sessions. Until then, IDR forgiveness remains taxable in Arkansas.
For more information on forgiveness options that could apply to you, visit our article on Arkansas state forgiveness programs.
How Can You Prepare for the Tax Bill on Forgiven Loans?
If Arkansas taxes your forgiven student loans, here’s how to get ahead of the situation:
Run the Numbers. Don’t guess—know exactly what you’re dealing with. Add the forgiven amount to your expected income for that year and apply Arkansas’s current tax rates, or have a tax preparer do it. If it’s IDR forgiveness in 2026 or later, run the federal numbers too.
Adjust Your Tax Withholding. Avoid surprises at tax time by increasing your withholding now. Update your W-4 or set aside estimated payments specifically for your Arkansas tax bill.
Explore Side Relief Options. If the Legislature doesn’t act to exempt forgiven loans, check whether other tax credits or deductions could soften the blow.
Plan for the Worst—Advocate for Better. Until lawmakers act, IDR forgiveness is taxable income in Arkansas. Push for legislative change by contacting your representatives and sharing your story. Real change happens when borrowers speak up.
Stay Flexible. The Arkansas lawmakers has a history of making mid-tax-season decisions, like exempting PPP loans or unemployment income. Keep an eye for updates on the Arkansas State Legislature website, and be ready to adjust your plans if they step in to help.
Related: Filing Taxes with Student Loans
What If You Can’t Afford the Tax Bill?
If the thought of paying state taxes on your forgiven loans makes your stomach drop, you’re not alone. Here’s how to manage it:
File Your Return, Even If You Can’t Pay Right Away. Skipping your tax return only makes things worse. Arkansas charges penalties for failing to file, on top of what you already owe. File on time to avoid unnecessary extra costs.
Set Up a Payment Plan with the State. Arkansas lets you spread out your tax bill into manageable monthly payments. You can apply directly through the Arkansas Department of Finance and Administration (DFA). The sooner you set it up, the lower your penalties and interest will be.
Look Into Hardship Relief. If paying the tax bill would cause extreme financial strain, contact the DFA to ask about hardship options. Depending on your situation, you might qualify for reduced penalties or a pause on collections.
Rework Your Budget for a Few Months. It’s not fun, but temporarily cutting non-essential expenses could help free up cash to cover the tax bill. Focus on getting through this one hurdle—it’s a short-term fix, not a permanent lifestyle change.
Get Professional Advice. A tax professional can help you find deductions, credits, or other strategies to lower what you owe. They can also work with the state on your behalf if you’re feeling overwhelmed.
A student loan lawyer in Arkansas can help you explore additional options if you’re struggling to manage your tax bill.
Bottom Line
Arkansas student loan forgiveness tax rules aren’t what anyone wants to deal with. The federal tax break from the American Rescue Plan Act ended on December 31, 2025, so IDR forgiveness in 2026 or later can bring both a federal and an Arkansas tax bill. PSLF should stay tax-free at both levels, but most other forgiveness could leave you budgeting for a bill when you expected relief.
Don’t let a surprise tax bill ruin your relief, get the answers you need today.
Book a call with our student loan experts.
We’ll break down what Arkansas’s tax rules mean for you, how to plan for them, and whether there’s a way to minimize your costs.
For legal help beyond the tax question, see our guide to finding an Arkansas student loan lawyer.
