Taxes on Student Loan Forgiveness

rjisaterp

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Now I am not for this forgiveness program as I paid my way through College with the help of the GI Bill and my disability I was retrained to another field...Accounting/Auditing.
If one is forgiven on a loan...it is considered taxable income. Here is an artice I came across about this subject.

Since March 13, 2020, federal student loan borrowers haven't had to think much about their student loan payments. The U.S. Department of Education suspended payments, interest was set at 0% and millions of borrowers hoped President Biden's debt relief plan would come to fruition.

But payments will resume soon — and the Biden administration’s student loan debt forgiveness plan is no longer an option thanks to the Supreme Court's June 2023 ruling — so borrowers are taking another look at their debt.

As you research available options, one factor is often overlooked: some forms of loan forgiveness are taxable. If you aren't prepared, the taxes on student loan forgiveness can be significant.

Do I have to pay income taxes on student loan forgiveness?​

According to the most recent Federal Student Aid Data Center data, 43.6 million people have outstanding federal student loans. For those struggling to manage their payments, loan forgiveness can seem like a dream come true. But student loan forgiveness tax consequences could lead to surprise bills — sometimes called the student loan tax bomb — when borrowers submit their tax returns.

The IRS considers canceled debt, including most forms of student loan debt forgiveness or student loan discharge, to be taxable income.

However, borrowers working toward loan forgiveness have been exempt from taxes thanks to the American Rescue Plan Act of 2021. This measure made forgiven student loans exempt from federal income taxes, but it only applies to loans that are discharged between January 1, 2021, and December 31, 20225.

The American Rescue Plan applies to all student loan forgiveness programs but only affects federal income taxes. Although some states adopted similar measures for state income taxes, not all followed suit.

As of 2023, Minnesota, Indiana, North Carolina, and Mississippi have stated that the balance of forgiven student loans will be taxed as income. Taxpayers in Arkansas, California, and Wisconsin could face the same
fate — the states are currently reviewing their tax laws and have yet to make a determination (as of June 2023).

Student loan forgiveness tax consequences after 2025​

The American Rescue Act's provisions regarding student loan forgiveness taxes will end on December 31, 2025. From January 1, 2026 onward, how student loan forgiveness and discharge programs are taxed depends on the program.

Public Service Loan Forgiveness (PSLF)​

Federal loan borrowers who work for non-profit organizations, government agencies or public service groups may qualify for PSLF if they work for a qualifying employer full-time for 10 years and make 120 qualifying monthly payments. After reaching those milestones, borrowers can apply for debt cancellation. Once approved, the government forgives the remainder of the federal loan balance.

PSLF is one of the few programs that is excluded from federal income taxes; none of the forgiven loan amount is taxable as income.

Income-Driven Repayment (IDR) Discharge​

IDR plans are for federal loan borrowers who have trouble affording their payments under the standard 10-year repayment plan. IDR plans extend the loan terms and base the borrower's monthly payments on a percentage of their discretionary income. The four IDR plans are:

  • Income-Based Repayment
  • Income-Contingent Repayment
  • Pay As You Earn
  • Revised Pay As You Earn
The government will discharge the remainder if the borrower still has a balance at the end of their loan term. However, the forgiven loans are taxable as income at the federal and state levels.

Important: President Biden announced the launch of the new SAVE IDR plan in June 2023. Under the SAVE plan, many borrowers could qualify for lower payments, and qualify for loan forgiveness in as little as 10 years. However, the new plan is being introduced in a phased approach, and all of its benefits won't go into effect until 2024.

Borrower Defense to Repayment Discharge​

Borrower Defense to Repayment Discharge is a program that eliminates federal student loans belonging to borrowers who their college misled, or if their schools engaged in misconduct and violated state laws.

The IRS and the U.S. Department of the Treasury have issued notices that clarify that loans discharged through Borrower Defense to Repayment are not taxable as income.

Total and Permanent Disability Discharge (TPDD)​

TPDD applies to borrowers who become totally and permanently disabled. The government will discharge the remaining loan balance for eligible federal loan borrowers.

How taxes are handled depends on when you qualify for discharge.

If you received discharge before January 1, 2018, the discharged loan amount is subject to federal income taxes. Loans discharged between January 1, 2028, and December 31, 2025, are exempt from federal income taxes. How TPDD will be taxed in 2026 and beyond is not clear at this time.

Tax on student loan forgiveness for private student loans​

Private student loans aren't eligible for federal loan programs like PSLF or TPDD. But borrowers with private student loans may qualify for other loan forgiveness or discharge programs. For example, some private lenders will discharge the loans of borrowers who become totally and permanently disabled.

The American Rescue Plan specifies that forgiven private student loans are also exempt from federal income taxes through the end of 2025. However, they may be subject to state income taxes.

Frequently asked questions​

Can I pay down my balance to lower my tax bill?​

Technically, you can pay down your loan balance to decrease your tax bill if you expect a loan discharge after 2025. But because those taxable programs are based on your income, you may have enough cash to pay down the debt; if you do, there's a chance your payments will go up in the future, decreasing the effectiveness of the forgiveness program.

How can I estimate how much I will owe in taxes due to student loan forgiveness?​

How much you will have to pay in taxes depends on the amount of loan forgiveness you receive and your tax bracket. You can use the American Institute of CPAs marginal tax rate calculator to see how loan forgiveness will impact your tax bill.

The tool can give you a ballpark figure of how much you'll owe so you can plan ahead. If you expect a large tax bill, setting aside a little cash every month in a high-yield savings account or CD can help you prepare.

If Congress extends the Rescue Plan past 2025, how will that affect borrowers?​

If Congress extends the American Rescue Plan past 2025, borrowers seeking loan forgiveness through IDR discharge, TPDD, and private loan forgiveness programs would be exempt from federal income taxes. PSLF is never taxed as income, so any extensions wouldn't impact borrowers working toward loan forgiveness through that program.
 

2BullyMama

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OH WOW... I didn't even think of the tax side of this craziness. I have many relatives and friends that are praying for some type of loan "forgiveness" but after reading this , it really could be look at as a loan default and you are then taxed on it as income. I have a Sallie mae loan for my nephew who died a few years after graduating from college, I was his co-signer... the loan doesn't go away in death, it is transferred to the co-signer. I would not be eligible for any of these programs or plans they are spewing, but as I said, I have MANY family that are praying to get some type of relief... the interest rates are monstrous for some that I think the taxable income would still be cheaper for them.
 
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oscarmayer

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This Paying-off-student-loans, deal is another way to buy votes. The people who have paid their loans are being screwed. More destruction of the U.S.A. That's my story, and ahm stickin' to it!
It's THAT simple...another vote grab. Give away the country for a damn vote...it's sickening.
 

grozavoron

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Thanks for sharing this info. It's definitely an aspect that many might not be aware of. While the student loan forgiveness program may seem like a political move, it's true that for some, it could be a much-needed relief. Still, it does raise the fairness question, especially for those who diligently paid off their debts. Speaking from personal experience, I managed to navigate the student loan journey with the help of experts. Their guidance kept me on track, avoiding hefty interest and unnecessary debt. Maybe it's time the government focuses on boosting financial awareness among students, so they can make informed decisions from the get-go and dodge the debt trap.
 
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oscarmayer

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Thanks for sharing this info. It's definitely an aspect that many might not be aware of. While the student loan forgiveness program may seem like a political move, it's true that for some, it could be a much-needed relief. Still, it does raise the fairness question, especially for those who diligently paid off their debts.
Also very unfair to those(students and parents) that saved and saved and worked their respective asses off to pay outright for the college education. They get nothing.
What about those that could easily afford to pay outright for the education and took the low interest loan(s) because it was fiscally advantageous and cheap $$$? Nice windfall for them.
What about people that decided that higher learning was going to be too expensive and opted to go directly into the workforce, and got a lower pay job just to make ends meet? Majorly screwed.
What about those that worked their respective asses off to get very high scores in grade school and got scholarships as a reward for the hard work. They get NOTHING?
The whole program was nothing more than a vote grab from the very beginning. The program feeds the entitlement mindset. Too many able-bodied young people sitting on their asses living off free gov't $$$. ANYONE that wants a job can get a job and PAY OFF THEIR DEBTS.
 

helsonwheels

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It's THAT simple...another vote grab. Give away the country for a damn vote...it's sickening.
Here in Canada we have the same thing going. Plus our idiot Trudeau is giving out student visas to come study here BUT recently got caught these student visas are being used by immigrants wanting to stay here in Canada n not even going to school. All for votes.
 

2BullyMama

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Well said @oscarmayer !!!! I’m one of those that couldn’t afford to go , one of eight children in one income family just wasn’t an op. Looking back, I don’t have regrets, I did as you said.. went into work force at 15 (after school) with a kickass work ethic and have been with a place for 36 yrs next month. All about putting in the effort.

I also think this topic can be added to the ‘keep them divided’ list… constant arguments about it
 
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