Tuesday, 04 October, 2022

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Is Student Loan Forgiveness Taxable?


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I’m sure many of you students and former students are excited about Biden’s announced $10,000 in student loan forgiveness. But what will it mean for your taxes? The short answer is not much, at least not federally. This is usually not the case, but this debt forgiveness is different.

Typical Debt Forgiveness

Usually, debt forgiveness is treated as income for the year the debt is forgiven. This includes student debt. They are multiple exceptions, of course. The Public Service Loan Forgiveness (PSLF) program allows student debt to be forgiven in exchange for working for a non-profit for ten years and the Total, and Permanent Disability (TPD) discharge program allows student debt to be forgiven for those who have a permanent disability. Neither of them are taxable.

Biden’s Student Loan Forgiveness

Biden’s plan for student loan forgiveness is to forgive $10,000 of student debt for individuals making less than $125,000 a year, or married couples making less than $250,000 per year. Pell grant recipients will receive up to $20,000 in student loan forgiveness. The average student loan debt, according to ABC News, is almost $40,000. Pell Grant recipients will have half of this amount forgiven, and non-Pell Grant recipients will lose a fourth.

The government also extended the moratorium on making payments on student debt by four months. This is the seventh extension since March 2020. The President claims this will be the final extension. The new end date is December 31, 2022.

Why This Debt Forgiveness is Not (Federally) Taxable

As reported by CNBC, The American Rescue Plan of 2021 will make all student debt relief tax-free through 2025. According to the White House’s fact sheet, this includes the $10,000 the President announced in 2022. So even if the debt forgiveness would normally be considered income, it isn’t in this case for federal taxes. State taxes, on the other hand, may be a different story.

State Versus Federal Income Taxes

First, I would like to remind you that each state has its own laws regarding state taxes. Some, like Texas, don’t even have a state income tax. These states are very unlikely to tax loan forgiveness. Other states do have state income taxes that are defined similarly to the federal government’s interpretation. This is why it is important to point out that debt forgiveness is usually taxable. Unless states pass their own versions of the American Recovery Plan, many states will likely tax Biden’s student loan forgiveness. If you live in a state with income tax, you may want to be advised by an expert on the tax situation in your state.

How This Effects Inflation

If you do not have any outstanding student debt or make more than the maximum a year, the only real effect you may experience is a slight increase in inflation. This increase, on top of the already high inflation people have been dealing with this year, may increase the cost of everyday goods even higher. This has led to some criticizing the move as benefiting former and current students at the cost of the rest of us.

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