Taxes And Student Loan Forgiveness

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I get a lot of questions about student loan forgiveness and taxes. 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.

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”:

There are Federal student loan forgiveness programs – Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness
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
There are student loan cancellation and discharge programs – These are programs for closed schools, false certification, unpaid refunds, and death and disability
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.

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.

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
Discharge for death and disability

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

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.

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.