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  • Is Student Loan Forgiveness Taxable?

Is Student Loan Forgiveness Taxable?

Take a closer look at some of the tax implications of student loan forgiveness,1 and learn how a GradFin student loan specialist2 can help you prepare.

Published June 27, 2023

11 min read

Table of Contents

  • Student loan forgiveness 101
  • What types of loans qualify for forgiveness?
  • How to determine the tax implications
  • Forgiveness saves money, no matter what

If you’re wondering if your student loan forgiveness is taxable, the short answer is maybe. Typically, whenever debt – including student loan debt – is forgiven, cancelled, reduced, or discharged, there could be tax implications.(3) You should always consult your tax expert and visit the U.S. Department of Education’s website for the latest information on student loan forgiveness.

In the case of student loan forgiveness, the tax implications generally depend on factors like what types of loan(s) you have, your total income, what state you live in, and your state’s tax rates.

Student loan forgiveness 101

Federal student loan borrowers have several potential paths to forgiveness including Income-Driven Repayment (IDR), Public Service Loan Forgiveness (PSLF), and President Biden’s proposed one-time student loan debt relief initiative of up to $20,000 (pending a ruling by the Supreme Court). When student loans are forgiven through any of these programs, it is likely you will receive a cancellation of debt form, known as Tax Form 1099-C.

The American Rescue Plan Act (ARPA) of 2021 modified the treatment of student loan forgiveness through 2025.(4) This generally includes federal student loan forgiveness under the following programs:(5)

  • IDR, including the One-time Account Adjustment
  • PSLF, including the Limited PSLF Waiver
  • The Biden Administration’s proposed one-time student loan debt cancellation (currently on hold)
  • The Total and Permanent Disability (TPD) Discharge
  • Borrower Defense to Repayment

While ARPA modified federal student loan forgiveness’ federal taxation, state tax laws could still be applicable. You should consult your tax advisor regarding state-specific requirements for forgiven student loan debt because some states have opted to follow the ARPA modifications and some have not. Visit irs.gov for more information.

Notice: One-time IDR Adjustment Deadline

If you’re a borrower with FFEL, Perkins, or Health Education Assistance Loan (HEAL) Program loans, the deadline to apply for a Direct Consolidation Loan is the end of 2023, to take advantage of this forgiveness opportunity. To learn more, schedule a free call with a GradFin student loan specialist.

What types of loans qualify for forgiveness?

To determine which student loan forgiveness programs you’re eligible for, it’s important to first understand what type(s) of federal student loan you have. You can do this by logging in to StudentAid.gov using your FSA ID (account username and password), and selecting “My Aid” under your name.

  • Forgiveness through IDR. Among the four IDR plans – which all offer borrowers a path to potential forgiveness in 20 or 25 years – different types of federal student loans qualify for different plans. For an in-depth look at what types of federal student loans are eligible for forgiveness under each IDR plan, visit the Student Aid website here, or learn some of the pros and cons here.
  • Forgiveness through PSLF. If you’re a full-time employee at a qualified nonprofit or government organization, then it’s important to know that only non-defaulted loans received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for forgiveness through the PSLF program. Loans received under the Federal Perkins Loan Program, or the Federal Family Education Loan (FFEL) Program don’t qualify for PSLF but may become eligible if you consolidate them into a Direct Consolidation Loan. Learn more about PSLF eligibility by visiting the Student Aid(6) website here.
  • Forgiveness through President Biden’s proposed student loan debt relief plan. Under President Biden’s proposed federal student loan debt relief plan for low and middle-income borrowers, only federal student loans, including parent PLUS loans, issued prior to June 30, 2022, would be eligible for forgiveness. Learn more here and at whitehouse.gov/.

Note that if you have private student loans, they’re not eligible for federal student loan forgiveness, but you could still potentially save through refinancing – learn more here. And if you refinance federal student loans you may no longer be eligible for certain benefits or programs and waive your right to future benefits or programs offered on those loans. Please carefully consider your options and talk with a GradFin student loan specialist today!

Notice: Biden Administration's Proposed Changes

There are currently proposed changes to the PSLF and IDR programs that could change eligibility, requirements, and potentially the amount of money you could save.(7) For more information, visit studentaid.gov or schedule a consultation with a GradFin specialist.

How to determine the tax implications of your forgiven student loan(s)

After you understand what types of federal student loans you have and what path(s) to potential forgiveness you qualify for, you’ll need to review some factors with your tax professional, including, for example, the estimated date of forgiveness, the amount of student loans forgiven and federal and state tax rules which could change by the time your loans reach forgiveness.

State taxes(8)

In certain situations, a borrower could incur state taxation as a result of student loan forgiveness, even if it is not taxed federally.

According to the taxfoundation.org, at present the following states may be on track to tax student loan forgiveness outside of ARPA. Don’t forget states can alter things, so it’s best to consult your tax professional for up-to-date information:

  • Arkansas (under review)
  • California (under review)
  • Indiana
  • Minnesota
  • Mississippi
  • North Carolina
  • Wisconsin (under review)

How do I prepare for any potential tax bill?

One way to prepare for a potential tax bill is to estimate your projected student loan forgiveness and set aside the amount of money you may owe in taxes early. How much you will be required to pay in taxes will depend on a host of factors including in what year your loan forgiveness occurs, the federal and state laws around taxation on student loans forgiven at that time, as well as your income and, therefore, what tax bracket you’re in. GradFin, in conjunction with your tax professional, can help you answer some of those questions and plan accordingly.

Forgiveness saves money, no matter what

Though incurring a tax on your student loan forgiveness is not ideal, the good news is that even if you live in a state that may tax your student loan forgiveness amount, you will still be saving money not only on the balance of the loan but on the interest that would have accrued over time.

To better understand the state tax implications of student loan forgiveness and avoid costly errors in tax reporting, it’s best to talk with a qualified tax professional, such as a Certified Public Accountant (CPA) or tax attorney.

Also, while federal student loan forgiveness and taxation of such is currently modified at the federal level, it’s important to note that this is a temporary provision under ARPA. Unless those provisions get extended or become permanent, the tax relief is scheduled to expire at the end of 2025.

For help to better understand what forgiveness options may work for your situation, you can schedule a free 30-minute consultation with our student loan experts at GradFin.

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    Laurel Road is a brand of KeyBank N.A. All products are offered by KeyBank N.A. Student loans, mortgages, personal loans, and credit cards ARE NOT FDIC INSURED OR GUARANTEED. Member FDIC. NMLS #399797. Equal Housing Lender. ©2023 KeyCorp® All Rights Reserved.

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    1. This article is intended for informational purposes only and should not be relied upon for tax, legal, financial or accounting advice. The information is based on current law, regulations and rates which are subject to change at any time, possibly with retroactive effect. Any such change in applicable laws or regulations could change the information described herein. GradFin is not a debt relief services company, lender, loan broker, broker-dealer, registered investment advisor, or insurance agent. Information provided does not constitute, nor does GradFin provide, tax, legal, financial, credit counseling or accounting advice. While GradFin aims to deliver high quality services and provide you with accurate information about the options that may be available for your student loans, your actual results may differ, and circumstances outside of our knowledge and control may impact your eligibility and options.
    2. GradFin and Laurel Road are brands of KeyBank N.A.
    3.  
      Sources:

    4. https://www.forbes.com/sites/adamminsky/2023/01/24/will-you-be-taxed-on-student-loan-forgiveness-in-2023-key-details/?sh=5667f39f139e
    5. https://taxfoundation.org/student-loan-debt-cancelation-tax-treatment
    6. https://www.forbes.com/sites/adamminsky/2023/01/24/will-you-be-taxed-on-student-loan-forgiveness-in-2023-key-details/?sh=5667f39f139e; https://www.nerdwallet.com/article/loans/student-loans/covid-tax-break-could-open-door-to-student-loan-forgiveness#:~:text=When%20you%20pay%20taxes%20on,into%20a%20higher%20tax%20bracket
    7. https://studentaid.gov/help-center/answers/article/loan-amounts-forgiven-under-pslf-taxable
    8. https://www.nerdwallet.com/article/loans/student-loans/covid-tax-break-could-open-door-to-student-loan-forgiveness#:~:text=When%20you%20pay%20taxes%20on,into%20a%20higher%20tax%20bracket
    9. https://www.taxpolicycenter.org/taxvox/which-states-tax-student-loan-forgiveness-and-why-it-so-complicated#:~:text=If%20a%20state%20uses%20the,be%20treated%20as%20taxable%20income; https://taxfoundation.org/student-loan-debt-cancelation-tax-treatment/; https://www.kiplinger.com/taxes/605152/states-that-could-tax-cancelled-student-loan-debt

    Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice, legal, financial, or tax advice. We cannot and do not guarantee their applicability or accuracy in regard to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. Calculators do not include the fees and restrictions that certain products may have. This calculator does not indicate whether you would qualify for a Laurel Road loan. Please visit the applicable banking product pages on laurelroad.com for specific terms and conditions.

    This information provided is for informational purposes only and does not substitute consultation with a legal, tax or investment professional for important financial decisions. Laurel Road assumes no liability for loss or damage incurred by use of the information provided. Please visit laurelroad.com for full product details, terms and conditions.