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December 19, 2021

Pennsylvania will eliminate state income tax on student loan forgiveness

Gov. Wolf says the change will help those working in public service careers save money

As federal student loan payments resume for borrowers at the end of January, resources and discussions of how borrowers can save money on their loan bills have been sent out by loan servicers and public servants. In a change to the Pennsylvania Department of Revenue, Governor Wolf moved to eliminate state income tax on student loan forgiveness. 

Two major loan forgiveness programs forgive a lump sum of federal student loans following a certain amount of work in the field, or a number of consecutive repayments. 

The specific programs noted by the Governor include the PA Student Loan Relief for Nurses (SLRN) program, which helps nurses in Pennsylvania working to fight COVID-19 by forgiving some of their student loans. It also includes the Public Service Loan Forgiveness (PSLF) program for public service workers and those in the nonprofit sector, forgiving loans for those who make 120 qualifying payments while working for a qualifying employer. 

As the loans are forgiven in a lump sum, Pennsylvania previously considered these taxable income, sending the borrower a hefty tax bill as a result. 

Though student loan forgiveness is not considered taxable income on a federal level following a decision made by President Biden in early 2021, Pennsylvania and Missouri are among the states that would bill borrowers after their loans were forgiven. 

Now, following a push from Senator Bob Casey, Montgomery and Chester County Sen. Katie Muth, Bucks County Sen. Steve Santarsiero, and Sen. Lindsey Williams of Allegheny County, Wolf instituted the change in a move he says will save public service workers money as they receive loan forgiveness through these programs. 

"The point of student loan forgiveness programs for public servants is that these are people who have chosen jobs, often in lower paying fields, because they want to make a difference," Gov. Wolf said in his announcement on Friday. "It's wrong to take what should be a blessing and turn it into just another burden." 

"Pennsylvanians have some of the highest student loan debt in the country—and when these students are finally eligible to see some of their loan forgiven through public service, they should not be burdened with a surprise tax bill," said Sen. Katie Muth. 

Gov. Wolf notes that for a public service worker with $50,000 in forgiven student loans in Pennsylvania will now be able to avoid a $1,535 state income tax bill. 

Gov. Wolf alerted the Department of Revenue to update their tax bulletin to implement the change. 

For those unable to qualify for loan forgiveness through one of these programs, information about the repayment resumption is available here. Student loan interest and repayments will resume on Jan. 31, 2022.