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)
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.
Have A Question About Loan Forgiveness?
Have a question about taxes and student loan forgiveness? Make sure you stop by our new Student Loan Forums and ask your question!
Patrice says
Questions on parents plus loan
Robert Farrington says
You might find this useful: http://growth360tci.wpengine.com/17101/options-if-you-cant-afford-your-parent-plus-loans/
Marsha says
Do you know any other company besides Ameritech that may help with parent plus loans. They do not serve Ohio. I am looking at 112,000.00 in parent plus loans and could really use help.
Robert Farrington says
Sadly, I don’t. Here are your options for your Parent PLUS Loans so you know: http://growth360tci.wpengine.com/17101/options-if-you-cant-afford-your-parent-plus-loans/
Kimmi says
I am a parent whose child took the loan out with my name as the main borrower, thru Nelnet. When the loan was applied for I was not working but caring for an elderly family member. I explained this to them at that time. They based it of my previous years taxes rather than listen to what I was telling them. I cared for this family member for several years. When I filed taxes I could only claim about 7k. But still claimed. The loan was turned over to the gov’t. Who has taken my taxes every year since. I am now currently working and want to pay this off but need to figure out just who to make the payments to. The loan was originally 5k but since has increased every year to now become between 8-10k. Any info would be much appreciated.
Robert Farrington says
You need to rehabilitate your student loan to stop the tax offsets. Read this – it walks you through where to find your loans and get started: http://growth360tci.wpengine.com/15577/student-loan-rehabilitation/
Daisy Malave says
Sadly, many repayment plans based on income usually are low payments that cover only part of the interest and the principal remain unpaid. At the end, the debt would be higher than the original. For example, the original debt was 80,000 and the repayment is only 500 monthly based on income. The actual payment should be 1000 to cover the interest and part of the principal in order for the debt to decrease, therefore the 500 are applied to the interest only. At the end of 20 years you owe 300,000. Then you are “forgiven” and you owe 33% of 300,000 to the IRS. That is 99,000 dollars in taxes.
Robert Farrington says
You are correct, with a big exception: insolvency.
We estimate that around 80-90% of borrowers experiencing forgiveness will be insolvent and owe nothing in taxes for their debt. In your scenario, do you think that a borrower who owes $300,000 would also have accumulated $300,000 in assets if they couldn’t afford their payments and were only making income-driven payments? In most scenarios no – so they wouldn’t owe any taxes.
In most cases, where borrowers are NOT insolvent and will owe taxes, their total student loan liability will be in the $30,000 to $50,000 range. In that scenario (let’s use $50k), it would put the borrower into the 24% tax bracket. And assuming they have no adjustments or tax credits, that would put the added tax liability at $12,000.
First off, that’s a significant savings over the student loan debt. Second, there isn’t really an alternative if they couldn’t afford their payments to being with. Remember, if a borrower is on an income driven plan, it’s because they don’t make enough income. The only real alternative is earn more (and get off the plan and see no forgiveness), or default – and see wages garnished and loan balances grow.
With that being said, if the borrower can’t afford the $12,000 in additional liability, there are multiple payment options to the IRS and they can pay that debt over the next few years (and it’s much lower than their old loan payment). So, if they simply put their old payment towards this new liability, they can make solid progress in a relatively short period of time.