Is Student Loan Forgiveness Taxable in Arkansas?

Updated on January 24, 2025

Quick Facts

  • Arkansas taxes forgiven student loans as income, even though the federal government doesn’t. You could owe up to 4.4% of the forgiven amount in state taxes.

  • For $50,000 forgiven, that’s $2,200. Lower earners might owe less, and a $150 tax credit could help.

  • 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 government has made forgiven loans tax-free through 2025, but Arkansas still considers them taxable income. That means relief from student loan forgiveness could leave you with a surprise state tax bill.

Here’s what that looks like: if you’re a higher earner, the Arkansas tax rate of up to 4.4% could cost you $880 on $20,000 in forgiven loans. 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 forgiveness through the one-time IDR account adjustment or other student loan debt relief programs, Arkansas will tax the forgiven amount as income. Here’s what that could mean for your state tax bill:

  • For $50,000 forgiven: You could owe up to $2,200 in state taxes (based on Arkansas’ 4.4% top tax rate).

  • For $100,000 forgiven: Your tax bill might climb to $4,400.

Lower-income earners may owe less thanks to Arkansas’ tiered tax system. Plus, some Arkansans earning under $90,000 could qualify for a $150 tax credit, which might help offset the cost.

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 rules. For forgiven student loans to be tax-free in Arkansas, the Legislature would need to pass a law explicitly exempting them.

While it’s possible, no action has been taken yet. Lawmakers meet regularly, and this issue could come up in future sessions. Until then, forgiven loans remain 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:

  1. Run the Numbers. Don’t guess—know exactly what you’re dealing with. Use Arkansas’ top tax rate (4.4%) to calculate your potential tax bill. If $20,000 of loans are forgiven, expect to owe around $880.

  2. 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.

  3. Explore Side Relief Options. If the Legislature doesn’t act to exempt forgiven loans, check whether other tax credits or deductions (like the $150 state tax credit) could soften the blow.

  4. Plan for the Worst—Advocate for Better. Until lawmakers act, forgiven loans are taxable income. Push for legislative change by contacting your representatives and sharing your story. Real change happens when borrowers speak up.

  5. 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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

Related: What to Do if You Can’t Pay Your Student Loans?

Bottom Line

Arkansas student loan forgiveness tax rules aren’t what anyone wants to deal with—but here’s the good news: forgiven loans are still tax-free federally, thanks to the American Rescue Plan Act. Unfortunately, Arkansas’s 4.4% state tax on forgiven loans 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.

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