How Student Loan Forgiveness Programs Are Taxed: 2022
The American Rescue Plan paused student loan forgiveness tax bombs for most programs through 2025 — but there are some exceptions. Read on to learn more.
Previously, student loan forgiveness had a catch; depending on the forgiveness program, you could have been hit with a student loan forgiveness tax bomb, meaning the forgiven balance was considered income for tax purposes. If that happened to you, you would have to pay a potentially huge tax bill, damaging the impact of forgiveness programs.
However, student loan forgiveness tax bombs have been paused for most programs through 2025 thanks to the American Rescue Plan. Right now, loan forgiveness under most programs isn’t taxed as income, but there are some exceptions.
How Student Loan Forgiveness Is Taxed
In 2021, the IRS sent a notification to student loan lenders telling them not to file Form 1099-C, Cancellation of Debt, to borrowers. Typically, this form is filed with the IRS and sent to the borrower, and it shows how much debt was forgiven or discharged. In the past, the borrower had to pay income taxes on this amount, so this is a big change.
However, that adjustment doesn’t mean you never have to pay taxes. Whether your student loan forgiveness balance is taxable as income is dependent on the program you qualify for and when the forgiveness goes through. The following programs are federal loan forgiveness and discharge programs:
Borrower Defense to Repayment
If you have federal student loans and you find that the school misled you or was involved in misconduct, you may be eligible for borrower defense to repayment discharge.
Previously, loans discharged through this program were taxable unless there were exceptions for certain schools. For example, the Treasury Department issued rulings that said former students of Corinthian College were exempt from taxes on loan discharge.
In January 2020, that changed. The Treasury Department issued new procedures that stated that all borrower defense to repayment discharges were not taxable.
Public Service Loan Forgiveness (PSLF)
PSLF provides loan forgiveness to federal loan borrowers who work for 10 years for a nonprofit organization or government agency and make 120 monthly payments. Forgiveness through PSLF was never taxable as income, so borrowers can apply for forgiveness without worrying about a surprise tax bill.
Total and Permanent Disability Discharge (TPDD)
Federal loan borrowers who become totally and completely disabled are eligible for TPDD. Whether your loan forgiveness is taxable depends on when you receive the discharge:
- Discharged before Jan. 1, 2018: If your discharge was processed before this date, your discharged loan balance may be taxable as income.
- Discharged on or after Jan. 1, 2018: Loans discharged on or after this date are not taxable as income.
Income-Driven Repayment (IDR) Forgiveness
IDR plans help borrowers afford their payments. IDR plans have extended loan terms and base the monthly payments on a percentage of the borrower’s monthly income, sometimes significantly reducing their minimum payment amount.
IDR plans can be 20 or 25 years in length. If the borrower has a balance at the end of their loan term, the remaining amount is forgiven.
Previously, that could be a problem. The balance forgiven through an IDR plan was taxable as income, and borrowers would face huge tax bills.
Due to the American Recovery Act, forgiveness through IDR plans is no longer taxable through 2025.
State-Level Student Loan Programs and Taxes
Along with federal student loan forgiveness programs, there are state loan forgiveness and repayment assistance programs too. Although some programs are exempt from income taxes, not all are; it depends on how they’re structured.
If you’re participating in a state forgiveness program, it’s a good idea to consult with a tax professional to avoid any surprises.
Private Student Loan Forgiveness
Although private student loans aren’t eligible for federal loan forgiveness programs such as PSLF, there are some situations where private loan forgiveness is possible. For example, some lenders offer discharges in cases of total and permanent disability.
The American Rescue Plan specifically calls out discharged private student loans as being not taxable as income until 2025.
Taxes and Future Loan Forgiveness Plans
Currently, most loans forgiven through federal loan forgiveness programs aren’t taxable as income. However, that’s a temporary rule. The American Rescue Plan lasts through 2025, so loans forgiven after that date may be taxable.
It’s possible that the government will pass further adjustments to keep borrowers from facing student loan forgiveness tax bombs, but there is no guarantee that will happen.
Managing Your Student Loans
Although there are forgiveness programs, only some borrowers will qualify for them. Chances are you won’t have to worry about a forgiven loan balance being taxable as income since most borrowers are ineligible for forgiveness.
If you have undergraduate or graduate student loans and are looking for ways to pay them off faster, another option is to refinance your debt. You could qualify for a lower rate that allows you to save money and get rid of your debt more quickly. With Juno, you can get the lowest possible rates on student loan refinancing and qualify for exclusive discounts and other benefits.
Kat Tretina is a freelance writer based in Orlando, FL. She specializes in helping people finance their education and manage debt. Her work has been featured in Forbes, The Huffington Post, MarketWatch, and many other publications.
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