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Student loan forgiveness has helped the tens of millions of people paying back student loans. On July 14, the Biden Administration announced that it will be forgiving some $39 billion in federal student loans, affecting more than 804,000 borrowers. Read more to find out the latest.
There has been a lot in the news about student loan forgiveness. Most recently, the Biden Administration’s move to forgive $39 billion of federal student loans.
This latest student loan forgiveness plan isn’t the same as the broad debt cancellation originally sought by the White House, which Supreme Court justices ruled against in a 6-3 decision on June 30. That action would have erased up to $20,000 of student debt for tens of millions of borrowers carrying federal loans. It had an estimated cost of $400 billion.
The approved Biden student loan plan helps borrowers in income-based payment plans. There are four of these plans, which aim to make loan payments more affordable for lower earners. Borrowers will be eligible for forgiveness if they have made either 20 or 25 years of monthly income-driven payments, the Department of Education said.
These income-driven repayment plans cap monthly payments--generally at 10% or 20% of a household’s discretionary income--depending on the plan. The program caps payment requirements for lower-income borrowers and forgives their remaining balance after a set number of years.
The U.S. Department of Education is also currently trying to put a new plan with a 5% cap in place. If you think you should be included in this group of borrowers, but haven’t received a notice, reach out to your loan provider directly.
What about the rest of the Federal student loans outstanding?
Millions more taxpayers with federal student loans will have to restart payments in October, the U.S. Department of Education announced on June 12. The department clarified that interest on the loans will resume on September 1.
In a statement, it said that it will reach out to borrowers with more information, but you should also check with your loan providers. Always make sure that all your contact information is up to date so that you receive any pertinent information in a timely manner.
Is student loan forgiveness taxable?
On the federal level, no. Under the American Rescue Plan Act of 2021, student loan debt forgiven from 2021 through 2025 won’t be included in federal taxable income.
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. Always reach out to your Tax Pro about how these decisions may affect you.
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 consider forgiven student loans as taxable income to the state. Fortunately, most states will not treat this as taxable income. You should talk with your Tax Pro to discuss if your state will tax the forgiven student loan debt.
Understanding the nuances
If you include the forgiven student loan amount as income on the federal, or on some states’, tax returns, you could pay too much in taxes. The IRS or state tax authorities won’t correct the error and send your money back. On the other hand, if you don’t include the forgiven debt as income in states that require it, you could face additional taxes, 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?
During the period of loan forgiveness, 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. Whatever the amount, that’s a lot less than if you continued paying off your original loan.
As we enter the summer and beyond, be sure to keep an eye on legislation and the latest breaking news, to make sure you report it correctly. You don’t want to pay more—or less—than you should. Questions? We are always here for you. Speak with your Jackson Hewitt Tax Pro today.