Updated Feb 2, 2024 - Economy

How student loan forgiveness factors into your tax bill

Illustration of a large apple looming over a school desk.

Illustration: Lindsey Bailey/Axios

Student loan borrowers who had a loan forgiven under President Biden may be off the hook for paying taxes on the erased debt.

The big picture: The Biden administration has been looking for ways to provide student loan borrowers with relief after the Supreme Court blocked his signature forgiveness plan.

  • The Education Department under the administration has doled out $136.6 billion in aid or forgiveness for more than 3.7 million people.
  • Some forms of that relief, however, could be taxed.

Zoom in: Current tax law treats forgiven or canceled debt as taxable income, though there are some exceptions.

  • If student debt is forgiven, it's treated as if the borrower earned additional income equal to the amount of debt forgiven, according to the independent tax policy nonprofit Tax Foundation.
  • Federal student loans forgiven under income-driven repayment (IDR) plans — like the latest SAVE plan — are typically treated as taxable income.

Yes, but: student loan borrowers working toward loan forgiveness under IDR plans are temporarily exempt from taxes under the American Rescue Plan Act of 2021.

  • Under ARPA, student loan debt that's forgiven between Jan. 1, 2021, and Dec. 31, 2025, is not included in federal taxable income.
  • "Whether Congress or the president through administrative action forgives student loans... if it's between 2021 and 2025, it will not be taxable income for federal purposes," Jared Walczak, vice president of Tax Foundation, told Axios.

Separately, at the state level, student loan debt forgiveness will go untaxed in most states.

  • There are only five states currently on track to tax any forgiven student loans, including Arkansas, Indiana, North Carolina, Mississippi and Wisconsin, according to Walczak.
  • "This is not because they made an affirmative choice to tax student loans as such," he said. "Instead, it's the nature of the way that the state's tax codes conform to the Federal Code."

Of note: Biden's signature student loan forgiveness plan that was blocked by the Supreme Court would have fallen under a federal tax exemption.

Meanwhile, student loan amounts forgiven through fixes in the Public Service Loan Forgiveness (PSLF) program are not considered income for tax purposes, according to the IRS.

  • The relief won't be taxed by the federal government, but some individual states may tax it.

Go deeper: What's going on with student loan relief

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