Will You Pay Taxes On Student Loan Forgiveness?

I get a lot of questions about whether you'll pay taxes on student loan forgiveness. The questions come in many forms:

• Will I owe taxes on the amount of my student loan debt forgiven?
• What will my student loan forgiveness tax burden be?
• Is the debt forgiven tax free for student loan forgiveness?

So, will I pay taxes on my student loan forgiveness amount?

The answer is simple: all student loan FORGIVENESS programs are tax free. However, the problem comes in how your define "student loan forgiveness". There's a difference here that matters a lot.

Note: All student loan forgiveness and discharges, of any loan type, is tax-free through December 31, 2025. See more below.

All Student Loan Forgiveness And Discharge Is Tax-Free Through 2025

With the passage of the American Recovery Act in March 2021, President Biden made all student loan forgiveness and discharge tax-free on the Federal level, regardless of loan type or program.

This means all Federal loans (Direct, FFEL, or Perkins) and private loans discharged or forgiven before December 31, 2025 will be tax-free on the Federal level.

Previously, for some repayment plans like IBR or PAYE, borrowers had to worry about a tax bomb. That risk is now gone through 2025. However, it could resume in the future, but many borrowers would qualify for insolvency anyway.

However, state taxes may still apply to student loan forgiveness, as every state varies with their tax treatment of student loan forgiveness.

Defining "Student Loan Forgiveness"

The problem starts with the definition of student loan forgiveness. There are four main types of events that people bucket under the title "student loan forgiveness":

1. There are Federal student loan forgiveness programs - Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness
2. There are student loan repayment assistance programs - These are the plans offered by States and individual organizations, like we list in our Student Loan Repayment Plans by State
3. There are student loan cancellation and discharge programs - These are programs for closed schools, false certification, unpaid refunds, and death and disability
4. There are student loan repayment plans that include forgiveness as part of their repayment plan - Income Based Repayment (IBR) and Pay As You Earn (PAYE)

So let's look at the taxability of each program.

1. Federal Student Loan Forgiveness and Taxes

Federal student loan forgiveness programs are tax-free. These plans include PSLF (Public Service Loan Forgiveness), teacher loan forgiveness, law school loan repayment assistance programs, and the National Health Service Corps Loan Repayment Program.

When discussing "Student Loan Forgiveness" programs, these Federal programs are what are typically being referred to. However, state taxes may vary on these programs (for example, Mississippi does tax PSLF loan forgiveness).

Sometimes student loan scam companies try to sell victims on student loan forgiveness, but what they are really peddling are student loan repayment plans that could include student loan forgiveness at the end. These plans are taxable and are different from Federal student loan forgiveness programs.

2. Student Loan Repayment Assistance Programs

Student loan repayment assistance programs vary when it comes to taxability of the debt forgiven. These include many of the programs I list here: Student Loan Forgiveness by State.

For these programs, you have to check with the program itself and determine whether you will owe taxes on the amount forgiven. For example, law school repayment assistance is typically tax-free. However, some state-based programs are tax-free on the state level but may be subject to Federal income tax.

Each program is different, so make sure you check.

Furthermore, some of these plans may be repayment assistance programs. In which case, they fall under the rules for student loan repayment plan assistance - which are currently tax-free up to $5,250 per year.

3. Student Loan Cancellation And Discharge Programs

Student loan cancellation and discharge programs are considered taxable income. The most common student loan cancellation and discharge programs include:

• Cancellation for closed school
• Cancellation for False Certification of the loan
• Cancellation for unpaid refund of the loan

If you receive a cancellation or discharge under these circumstances, you may pay taxes on the amount of the student loan debt forgiven.

Note: Starting in 2018, President Trump made death and disability discharge tax-free. Starting 2021 through 2025, these programs will also be tax-free.

4. Student Loan Repayment Plans With Forgiveness

Finally, student loan forgiveness programs that are part of repayment programs such as IBR or PAYE (where you get your balance forgiven after making 20 or 25 years of payments) is considered taxable income. However, through December 31, 2025, these programs also are tax-free on the Federal level.

We actually break down the taxability of these programs here, and why it still makes sense: Secret Student Loan Forgiveness Programs. As you can see from those examples, just because you pay taxes on the amount forgiven doesn't mean that it's a bad deal. In fact, you'll always owe less in the end by using these programs versus not using these programs.

State Taxes On Student Loan Forgiveness

It's important to note that some states may assess taxes on student loan forgiveness, even though the federal government does not. For example, Mississippi currently taxes Public Service Loan Forgiveness, while no other state does.

Given that each of the 50 states has different laws and rules, you'll likely want to consult a tax professional in your state.

However, we do have a guide on State Taxes and Student Loan Forgiveness here.

Don't Sweat The Taxes

For many borrowers, the though of paying taxes on any amount forgiven can be daunting. However, you shouldn't worry about what the tax implication will be years down the road. The best thing you can do is pick a student loan repayment plan or pursue a forgiveness path that works for your.

There's a lot of things that can happen between now and forgiveness, including changes to the law. For example, Trump just made death and disability discharge tax free starting in 2018. And President Biden made all programs tax-free through 2025. It can change!

Furthermore, you might not even owe taxes due to insolvency. This is a complicated tax process, but we break it down here: Student Loan Forgiveness and Insolvency.

Finally, if you think you may have built some savings, you can always plan for your tax bomb. No matter what, it will be significantly less than you owe on your student loans.