Public Service Loan Forgiveness is not taxable by any state except Mississippi. Every other state with an income tax conforms to the federal exclusion that keeps PSLF out of gross income, and nine states have no income tax at all. That answer holds in 2026, even though a separate temporary federal exemption for other kinds of student loan forgiveness expired at the end of 2025.
Why the Federal Answer Drives the State Answer
PSLF has been excluded from federal gross income since the program began, under 26 U.S.C. § 108(f)(1), which covers loan forgiveness tied to working in a qualifying profession for a required period.1Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness That fits PSLF exactly: 120 qualifying payments while working for a government agency or nonprofit, and the rest is discharged. The exclusion has no expiration date.2Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes
State income tax codes almost all start from a federal number, usually federal adjusted gross income or federal taxable income. Because PSLF never enters that federal starting figure, it doesn’t enter the state calculation either. A state has to affirmatively add PSLF back in to tax it. Almost none do.
Mississippi Is the Only State That Taxes PSLF
Mississippi doesn’t use federal AGI as its starting point. It defines taxable income under its own code, and the state has confirmed that all forms of student loan forgiveness, PSLF included, count as taxable income. A 2026 bill, HB 842, would have excluded PSLF from Mississippi’s gross income, but it died in committee in February 2026. Until the legislature acts, a Mississippi resident who receives PSLF should expect a state income tax bill on the forgiven balance.
The math can be meaningful. At Mississippi’s top rate of 5 percent, an $80,000 forgiven balance produces roughly $4,000 in state tax. Nothing is withheld from a debt discharge, so the full amount lands when you file. Estimated payments or a dedicated savings bucket in the year of forgiveness will keep it from being a surprise.
Don’t Confuse PSLF With Income-Driven Repayment Forgiveness
Most articles listing “states that tax student loan forgiveness” are actually talking about income-driven repayment (IDR) forgiveness, not PSLF. The two programs share an outcome but not a tax rule.
PSLF is tied to a qualifying profession and 120 payments, so it fits the permanent exclusion in § 108(f)(1). IDR forgiveness wipes out a balance after 20 or 25 years of payments regardless of employer, and it does not qualify for that permanent exclusion. IDR forgiveness was tax-free only under a temporary provision in the American Rescue Plan Act of 2021, which covered 2021 through 2025 and has now expired.3Internal Revenue Service. Publication 970, Tax Benefits for Education Starting in 2026, IDR forgiveness is federally taxable again. PSLF is not.
That distinction matters at the state level too. Several states will tax IDR forgiveness in 2026 while continuing to exclude PSLF. Arkansas, Indiana, Minnesota, North Carolina, and Wisconsin fall into this group. Minnesota has permanently conformed to the federal exclusion for profession-tied forgiveness. North Carolina has not decoupled from § 108(f)(1). Arkansas has explicitly stated that PSLF is excluded from state income while IDR-based forgiveness is not. If you’re pursuing PSLF in any of these states, the headlines about state taxation of forgiven loans don’t apply to you.
States With No Income Tax
Nine states impose no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. State taxation of PSLF is a non-issue in any of them. Washington taxes certain capital gains above a threshold, but a forgiven student loan isn’t a capital gain.
Reporting PSLF on Your Return
You may receive a Form 1099-C when your balance is discharged, and the reporting rules for student loan discharges are shifting in 2026 as the ARPA-era provisions expire.4Internal Revenue Service. Instructions for Forms 1099-A and 1099-C A 1099-C doesn’t mean you owe tax. It reports the discharge; excluding it under § 108(f)(1) is your job on the return.
In Mississippi, the forgiven amount goes on the state return as income. Everywhere else with an income tax, the forgiven balance follows the federal treatment and stays out of state income.
The Insolvency Exclusion for Mississippi Filers
If you live in Mississippi and your total liabilities exceed the fair market value of your assets at the moment your loan is forgiven, you may qualify for the insolvency exclusion under 26 U.S.C. § 108(a)(1)(B).5Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness The exclusion applies federally and in most states that conform to federal definitions of income. You can exclude only up to the amount by which you were insolvent: the gap between your debts and your assets, measured immediately before the discharge.
Borrowers carrying a large student loan balance alongside other debts are often insolvent at the moment of forgiveness. Someone who owes $150,000 in total debts against $100,000 in assets is insolvent by $50,000 and could exclude up to that amount. The calculation is precise and time-sensitive, so run it with a tax professional in the year you expect the discharge. If the tax still lands and paying in full isn’t realistic, Mississippi’s Department of Revenue offers installment agreements, and offers in compromise are available in some hardship cases.