Taxes Student Loan Forgiveness

Taxes Student Loan Forgiveness

The IRS says that borrowers who receive student loan forgiveness may have to pay taxes on the amount that gets discharged. Specifically, the IRS says that if a borrower receives student loan forgiveness under the Public Service Loan Forgiveness Program or an income-driven repayment program, the amount forgiven isn’t subject to taxes. If you get your loans discharged under another type of program (i.e., by making payments for 10 years), you might need to pay taxes on some or all of those payments depending on their size relative to your income levels and other factors.

The tax implications of student loan forgiveness depend on what type of program you used to get your loans forgiven.

The tax implications of student loan forgiveness depend on what type of program you used to get your loans forgiven. If you are being forgiven for a public service job, such as working in a government or nonprofit organization, the debt that is forgiven is considered taxable income by the IRS. This means that any public service loan forgiveness will be taxed at your marginal tax rate—the highest rate of taxation you pay for that year. If you were paying taxes on an income-driven repayment plan and have your balance reduced as part of this plan, then again: the amount forgiven will be subject to income tax in the year it’s taken off your record!

There are also some exceptions when it comes to counting student loan forgiveness (or cancellation) as taxable income:

Borrowers who use the Public Service Loan Forgiveness (PSLF) Program don’t have to pay taxes on their discharged loans.

If you’re a student loan borrower who has a federal loan, and is employed full-time in a public service job, you may be able to have your loans forgiven under the Public Service Loan Forgiveness Program. The program forgives remaining debt after 120 qualifying payments (10 years of payments).

However, if you don’t qualify for this program or decide not to participate in it, there are some other ways that you can reduce your tax burden on student loans.

The federal student loan forgiveness program provides tax-free forgiveness to borrowers who work in public service or have a financial hardship, such as high debt and low income.

The federal student loan forgiveness program provides tax-free forgiveness to borrowers who work in public service or have a financial hardship, such as high debt and low income.

Under borrower-initiated forgiveness programs, the IRS considers the discharged amount as taxable income.

If you receive a discharge of your student loan through an income-driven repayment plan or have the remainder of your loans forgiven under borrower-initiated forgiveness programs, the IRS considers the discharged amount as taxable income.​

Income tax issues related to student loan debt are complicated and can be difficult for borrowers to understand. The IRS offers several resources on its website that will help you navigate these issues, including:

• How do I file my taxes?
• What is taxable income?

If you’re a borrower who works in a public service job, there’s no need to worry about your student loans getting discharged. Borrowers who use the Public Service Loan Forgiveness (PSLF) Program don’t have to pay taxes on their discharged loans. But if you’re not eligible for PSLF or decide it’s not right for you, there are other ways that you can reduce your tax burden on student debtIf you have questions about how your student loans will affect your tax return, speak with a tax professional. The IRS offers resources to help you find a reputable one near where you live..

Income-driven repayment plans may be a better option for borrowers who have high debt and low incomes.

If you have high debt and low income, then income-driven repayment plans may be a better option for your student loans than the Public Service Loan Forgiveness program. Income-driven repayment plans can help you pay off your student debt faster by lowering your monthly payment. However, they do not eliminate your interest payments entirely like Public Service Loan Forgiveness does.

Public service and income-driven repayment are tax-free forgiveness options.

Two common types of student loan forgiveness are tax-free. The first is Public Service Loan Forgiveness, which forgives federal loans for borrowers who work in public service, such as teachers or nurses. To qualify, you must be on an income-driven repayment plan and make 120 monthly payments while working full-time at a qualifying job.

The second type of tax-free student loan forgiveness is available through income-driven repayment plans. These programs allow borrowers to cap their monthly student loan payments at a certain percentage of their discretionary income—typically 10% to 20%. Income-driven repayment plans also forgive outstanding balances after making payments for 20 or 25 years (depending on the specific plan).

The tax implications of student loan forgiveness depend on what type of program you used to get your loans forgiven. Borrowers who use the Public Service Loan Forgiveness (PSLF) Program don’t have to pay taxes on their discharged loans. Under borrower-initiated forgiveness programs, the IRS considers the discharged amount as taxable income. Income-driven repayment plans may be a better option for borrowers who have high debt and low incomes.