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.(4) 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),3 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.(1) This generally includes federal student loan forgiveness under the following programs:(6)
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.
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(7) 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!
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.
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)
- 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.