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Education Tax Topics

Is Federal Student Loan Forgiveness Taxable?

Mark Steber

Chief Tax Information Officer

Published on: January 18, 2023

Student loan forgiveness could help millions of people who are paying back student loans. If that’s you, thousands of dollars you owe could disappear overnight. What will that mean for you and your income taxes? Here’s what you need to know.  

What is federal student loan forgiveness?

In 2022, the Biden Administration announced a plan to cancel $10,000 or more in federally administered student loan debt, if you earn less than $125,000 ($250,000 if you’re married). A federal appeals court has temporarily blocked this aid. For the time being, student loan interest and payments are paused until June 30, 2023, or until the courts resolve forgiveness lawsuits. The U.S. Department of Education has stopped accepting applications, but will keep applications it’s already received.

Student loan forgiveness means that, if you’re eligible, you won’t have to repay some, or all, of your student loans from the U.S. Department of Education. This is only for federally backed student loan debt, not for private loans.

Do I qualify for student loan forgiveness?

Yes, if according to your 2020 or 2021 adjusted gross income, you earned less than $125,000 ($250,000 if you’re married). Do not use your 2022 income. If you received a Pell Grant—even if only for one year or a partial Pell Grant—you could qualify for an extra $10,000 in cancellation, even if you’re still in school. Additionally, if your parents have a federal parent PLUS loan, they’re eligible for $10,000 in cancellation, too.

Who qualifies?

Earned under $125,000 ($250,000 if you’re married) in 2020 or 2021 Up to $10,000 ($20,000 for married couples)
Pell Grant recipient (even for one year or a partial amount) An extra $10,000
Parents with PLUS loans Up to $10,000
Current students Up to $10,000

For a full list of who qualifies, visit the U.S. Department of Education.

Is student loan forgiveness taxable?

On the federal level, no. There are no federal tax implications for accepting any student loan forgiveness.

Additionally, the American Rescue Plan Act of 2021 created a tax rule that student loan debt forgiven from 2021 through 2025 wouldn’t count toward federal taxable income.

Are any states taxing student loan forgiveness?

Be ready on the state level: While the IRS will not tax you, a few states have laws that treat forgiven debt as income, and therefore you could pay state tax. Most states will not treat this as taxable income. You should talk with your Tax Pro to discuss if your state has unique laws you should know about.

Tip: Don’t pay more than you have to

If you include the forgiven student loan amount as income on the federal, or on some states’ tax returns, you could pay too much. The IRS or state tax authorities won’t correct the error and send you money. On the other hand, if you don’t include the forgiven debt as income in states that require it, you could face additional penalties and interest.

It's important to know that additional legislation at the state level continues to make this situation fluid. It’s a good idea to monitor your state’s rules for changes.

How much can you be taxed on student loan forgiveness?

Again, you wouldn’t be taxed at the federal level, but you could be on the state level. The maximum potential tax bill—for a typical borrower with $10,000 in canceled debt—varies by state, ranging from $200 to roughly $1,850. 

Certainly, you’re looking forward to student loan forgiveness, so that some or all of your debt goes away. Just be sure to keep an eye on legislation, to make sure you report it correctly. You don’t want to pay more—or less—than you should. Questions? Speak with your Jackson Hewitt Tax Pro today

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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