Student loan forgiveness & what you need to know

What is student loan forgiveness and why is it significant?

Student loan forgiveness is when a portion, or all, of your debt is eliminated by the government, and you are no longer obligated to repay the amount.

There are multiple student loan debt relief programs. Some were added in the past few years, and there is an ongoing interest to increase and expand loan forgiveness. According to WhiteHouse.gov, more than 3.7 million Americans have benefited from having their debt canceled. But what it means for your taxes is kind of confusing. In general, most regular canceled debt is reported on a 1099-C form, but it does not need to be reported on this form if the amount is less than $600.

In general, student loan forgiveness is generally taxable to the loan recipient – or the person forgiven the debt. But certain loan forgiveness will not be taxed, including the following.

• All types of student loan forgiveness through December 31, 2025.
• Student loans for colleges that closed and are no longer part of the education system (federal or private) are generally forgiven. If these loans were forgiven under the “Closed School” or “Defense to Repayment,” the loan balance forgiven is not taxable.
• Other nontaxable student loan forgiveness (discharge) includes loans forgiven after 10 years of consistent payments for those who are public fields teachers, doctors in poverty-stricken areas or on reservations, etc.

The IRS does not require a Form 1099-C, Cancelation of Debt, to be issued when there is a canceled student loan from a closed school. Others do issue a Form 1099-C when the debt canceled is greater than $600.

Even if you receive a 1099-C Form for student loan debt cancellation, there will be no federal income tax due through December 31, 2025. But do not confuse student loan debt with regular debt forgiveness, which is fully taxable.

While the American Rescue Plan Act exempts federal student loan forgiveness from federal taxation, it does not necessarily exempt borrowers from state income taxes. Many states have laws or policies that mirror the federal tax treatment of debt cancellation events, but this is not always the case.

An important thing to understand is that if you include the forgiven student loan amount as income on your tax return, you could be paying too much in taxes. And the IRS won’t correct your mistake of including this as income.

Similarly, if your state requires you to include this money as forgiven debt and you don’t, you could face additional taxes, penalties, and interest. 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.

Can I pay down my student loan balance to lower my tax bill?

Student loan interest paid is tax deductible for tax year 2023. You can deduct up to $2,500 on your federal income tax return for these payments if you qualify.

If you are paying on your student loans, you can deduct the interest paid, even if you didn’t get Form 1099-E and meet a few other requirements. An example of this is being legally obligated to pay interest on the loan, you’re not filing as Married Filing Separately, and have an income below a certain modified adjusted gross income amount.

Eligible student loan interest includes the following.

• The loan was taken out to pay qualified educational expenses for you, your spouse, or an eligible dependent when you took the loan.
• The payments were made within a reasonable time before or after you incurred the education expenses.

Who is eligible for student loan forgiveness?

There are currently multiple student loan forgiveness plans. While they are not available to everyone, many might still qualify.

At a high level, there are five federal student loan forgiveness plans.

• Public Service Loan Forgiveness (PSLF) is available through the U.S. Department of Education for federal Direct Loan borrowers.
• The Teacher Loan Forgiveness (TLF) Program offers up to $17,500 in student loan forgiveness to teachers with Direct or FFEL program loans. This is available to those who teach full time for five consecutive years at an eligible school or organization that serves low-income students.
• Health professional loan repayment is available if you work in a qualifying healthcare role and apply for assistance from organizations like the National Health Service Corps or the National Institutes of Health.
• Service member loan repayment is available for members of the military. It varies by program and military branch.
• Income-driven repayment is available through the Department of Education, through four available programs.

What are the income-driven repayment plans?

• Pay As You Earn (PAYE)
• Saving on a Valuable Education (SAVE)
• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)

You can apply for these student loan forgiveness programs if you are eligible. For more information visit the Federal Student Aid website.

There are constant student loan forgiveness updates and proposals from the current presidential administration and members of Congress. It’s important to watch official announcements closely to see what benefits you might take advantage of. Have questions? Find an office near you and work with a Tax Pro today to learn more.

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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