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Is Student Loan Forgiveness Taxable?

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Although Biden’s original plan to help nearly 43 million Americans receive student loan forgiveness was blocked by The Supreme Court, many borrowers still benefited from other program changes. In July, the Department of Education notified 804,000 borrowers that they were eligible for student loan forgiveness. This was due to the recent fixes to income-driven repayment plans implemented by the Biden-Harris Administration. To date, the Administration has helped more than 3.4 million borrowers receive a combined total of over $116 billion in student loan forgiveness.

If you’re one of the many who will see their student loan debt diminish or disappear, you may be wondering, “Is student loan forgiveness taxable?” It’s a good question to ask considering tax season is right around the corner. For most, there will likely be no tax liability. There are, however, several factors to consider, and where you live could complicate matters.     

Student Loan Forgiveness & Taxes

Student loan forgiveness is a program designed to relieve borrowers of the obligation to repay their student loans under certain circumstances. These circumstances typically include working in public service, teaching in low-income schools, or fulfilling other specific criteria. While these programs can provide much-needed relief for borrowers, it’s essential to understand that the forgiveness of the loan amount may have tax implications.

Generally, when you have a debt canceled or forgiven, you’ll pay taxes. This is because the debt has gone from being a loan to essentially income that must be reported on your tax return. If it’s a large amount that’s canceled, your tax liability could be substantial. In terms of student loan forgiveness, however, the rules vary depending on the program.

Non-Taxable Forgiveness Programs

The following student loan forgiveness programs are currently not taxed at the federal level.

Public Service Loan Forgiveness (PLSF)

Since its creation in 2007, Public Service Loan Forgiveness (PSLF) has always been non-taxable under federal law. This also includes the Limited PSLF Waiver Program that ended on October 31, 2022.

Total and Permanent Disability (TPD) Discharge

The Total and Permanent Disability (TPD) Program, which has undergone some recent changes, was not exempt from taxes until a few years ago. Noting that those receiving forgiveness under TPD were already struggling financially, Congress passed a law in 2017 making TPD exempt from taxes through 2025.

Borrower Defense to Repayment Program

Borrowers who attended schools that misled them or engaged in deceptive practices can seek relief under the Borrower Defense to Repayment Program. This year, the U.S. Department of Education (ED) has approved claims against several colleges, including:

In most cases, borrowers will have their loans discharged without needing to take any additional action. The IRS has also taken the position that loans discharged under “Defense to Repayment” are never taxable.

Other Federal Programs – Tax Relief Through 2025

Thanks to the American Rescue Plan Act of 2021, all other federal student loan forgiveness and cancelation plans are temporarily exempt from federal taxation through 2025.

What About Private Student Loans?

If you are one of the few people who have had private student loan debt canceled or forgiven, the unfortunate news is that it may still be taxable. At this time, the IRS has not made statements or provided any guidance related to the taxability of this type of student loan debt. Unless advised by a tax professional to do so otherwise, assume that you’ll need to include any canceled private student loan debt as income on your tax return.

State Tax Liability

Although the federal government has taken steps to ensure borrowers are not hit with a big tax bill, there are a few states that may attempt to collect taxes. For example, Mississippi, Indiana, Wisconsin, Arkansas, and North Carolina all treat forgiven student loans as taxable income. If they don’t change their laws to mirror the federal tax exemption, borrowers in those states could receive larger tax bills next year. Other states, such as New York and Pennsylvania, have already indicated that they will follow federal guidelines and not tax any student loans forgiven under Biden’s program. Those who live in Florida and other states with similar tax structures don’t need to worry since they don’t pay state income taxes anyway.

Need Help?

If you received student loan forgiveness or cancelation in 2023, be sure to check with your state’s Department of Revenue to determine your income tax liability before filing your returns next year. It’s also a good idea to consult with a tax professional if you have any additional questions related to student loan forgiveness and taxes. For a free consultation, call Tax Defense Network at 855-476-6920.