Can Student Loan Forgiveness Be Taxed?

Q: Do you have to pay taxes on student loan forgiveness?

Based on the standard rules under the Internal Revenue Code, student loan forgiveness is taxable, but it generally depends on the program that granted your student loan forgiveness. However, since the enactment of the American Rescue Plan Act of 2021, borrowers do not have to pay federal taxes on student loan forgiveness from 2021 through 2025. However, state tax may be different. Your state’s rules might identify the forgiven balance as taxable income. Be sure to check.

Q: What is the tax rate for student loan forgiveness?

There is no universal tax rate for student loan forgiveness. If you face a student loan forgiveness tax on your canceled debt, the forgiven amount is typically added to your taxable income. Your state might use a flat income rate or a tiered rate based on income brackets. If your state uses a tiered income tax rate, you’ll be taxed starting at the lowest marginal tax rate up to a specified income dollar amount. Then, income above that threshold is taxed at the next marginal tax rate, and so on.

Q: What states tax student loan forgiveness?

Rules regarding taxation of forgiven student loan debt vary between states, and the legislation is continuously changing. Some states, like Washington and Texas, impose no income tax on residents, which means student loan forgiveness isn’t taxable in those states. Other states consider canceled student debt as taxed income. And still other states conform to how loan forgiveness is treated under the federal tax code. Your best option is to check the situation in your state before you file your taxes. You may also want to consult with a certified tax expert.

Jennifer CaloniaUpdated August 22, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Student loan forgiveness may be taxed by individual states, but student debt discharged in the years 2021 through 2025 will not be subject to federal income tax.A provision in the American Rescue Plan Act of 2021 (ARPA) modified the treatment of student loan forgiveness. Under the modification, any student loan forgiveness that occurs during the five years of 2021–25 will not count as taxable income at the federal level. The provision applies to any debt forgiveness on postsecondary education loans, including federal and private student loans. States, however, may classify student loan forgiveness as taxable income. Below we highlight how some states may tax student loan forgiveness.

Is Student Loan Forgiveness Taxable?

Typically, when you file your income taxes, you need to determine whether you owe federal and state taxes on your earnings. The same consideration applies to any student loan cancellation amount you received because it’s typically considered income. Here’s what you need to know about paying taxes on student loan forgiveness at the federal and state level:

Federal Taxes and Forgiveness

When it comes to paying federal taxes on student loan forgiveness, the IRS code is clearer than state rules. Thanks to the ARPA law enacted during the Covid-19 pandemic, borrowers who receive student loan forgiveness under any program from 2021 through 2025 are not required to pay federal taxes on student loan forgiveness.This rule applies whether the canceled debt was granted through a longstanding forgiveness program like a federal income-driven repayment plan or a debt settlement agreement between a private lender and borrower.

State Taxes and Forgiveness

At the state level, whether student loan forgiveness is taxable isn’t as straightforward. States have varying definitions of what’s considered taxable income, and certain states (such as Alaska, Florida, and Texas, to name a few) don’t impose an income tax at all.Whether or not you may have to pay taxes on student loan forgiveness depends on whether your state conforms to the federal tax code. In states that practice conformity with federal treatment of forgiven student loans, you might not be required to pay taxes on your discharged debt.However, the type of conformity differs between states. Some adopt what’s called “static conformity,” implementing the federal code during a specific time. Other states practice “rolling conformity,” which means they use the federal tax code as their basis each tax year. And still other states adopt only certain sections of the tax code.What this means is that you might have to pay taxes on student loan forgiveness if your state doesn’t conform to the Internal Revenue Code. But it also depends on the type of student loan forgiveness you received. For example, most states generally adhere to the federal treatment for forgiveness under the Public Service Loan Forgiveness (PSLF) program, so you would not be taxed on canceled PSLF debt.

Who May Be Taxed on Their Student Loan Forgiveness

Under the standard Internal Revenue Code, canceled personal debt, such as forgiven student loans, are taxable events.However, there’s usually an exception for loan forgiveness that was granted under a forgiveness program that requires a service contract in exchange for cancellation, such as:

PSLF

Federal Teacher Loan Forgiveness

Loan repayment programs under the National Health Services Corps Loan Repayment Program

Borrowers who received forgiveness under another discharge program, like Closed School Loan Cancellation, also typically won’t incur federal taxes on the forgiven amount. Normally, individuals who were granted student loan forgiveness under certain programs, like through a federal income-driven repayment plan, might face additional income taxes under standard tax code. However, thanks to ARPA, higher education loans that are forgiven through 2025 are not considered taxable on federal returns.

How Is Student Loan Forgiveness Taxed?

Student loan forgiveness is technically considered a cancellation of debt. As such, it’s typically taxable as personal income. However, the IRS tax code exempts forgiven student loan debt that’s discharged from 2021 through 2025 — meaning the amount that’s forgiven isn’t included in your federal income tax calculation.If you owe state taxes on your forgiven debt, the calculation can vary between states. Some apply a flat income tax rate which makes the calculation for your student loan forgiveness tax, if applicable, simpler to determine. However, states that apply a graduated income tax rate system use a tiered rate based on income brackets. You should check to see how the calculation is done in your state.Is student loan forgiveness taxable? Ultimately, whether you’re liable for taxes on discharged student debt and how much you’ll pay depends on 1) the program that granted the discharge (for instance, PSLF doesn’t incur federal taxes, and most states don’t tax forgiveness under this program), 2) whether your state chooses to include the canceled debt as taxable income, 3) how much student loan debt of yours was forgiven, and 4) your state income tax rate(s).Recommended: How to Claim Your Student Loan Interest Deduction

Do You Have to Report Student Loan Forgiveness on Tax Returns?

In terms of your federal tax return, the IRS states that, generally, canceled debt must be reported as income. However, if the forgiven debt isn’t taxable — which is currently the case under federal code for forgiven student loans — you can exclude it from your gross income calculation. However, when calculating your gross income for state taxes, refer to your state’s income tax rules and consider consulting a certified tax professional to confirm your state’s tax requirements regarding student loan forgiveness.Recommended: Guide to State-Based Student Loan Forgiveness Programs

The Takeaway

Although you don’t have to pay federal income tax on forgiven student loans through 2025, you might owe state taxes on the discharged amount, depending on the specific rules in your state. Check your state’s income tax regulations. It might also be wise to discuss your student loan forgiveness tax liability with a certified tax expert. If you don’t qualify for student loan forgiveness but want to refinance your debt, Lantern by SoFi can help. Refinancing may lower your monthly payment, but be aware that refinancing federal loans makes you ineligible for federal benefits, such as income-driven repayment plans. (Lowering your monthly payment by extending your loan term could also increase your total interest costs.)Lantern can help you compare student loan refinance rates and find the best one for you.

Frequently Asked Questions

Do you have to pay taxes on student loan forgiveness?

What is the tax rate for student loan forgiveness?

What states tax student loan forgiveness?

Photo credit: iStock/akinbostanci

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About the Author

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.

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