Student Loan Forgiveness Tax 2022-2023
Student loan forgiveness isn’t a free ride. After you feel the weight of your student loan lifted, there's a student loan forgiveness tax waiting for you.
Updated by Roopsi Gupta on 29th November 2021
- The government removed the tax obligation for students to pay taxes on student loan forgiveness from 2021 to 2025.
- On January 1, 2026, students will have to pay taxes on certain types of student loan forgiveness.
- Some specific types of loan forgiveness aren’t counted as taxable income and won’t be counted as taxable income in 2026 either.
- It’s best to consult a tax professional when dealing with taxes on student loan forgiveness.
Congratulations on achieving student loan forgiveness. For many students, it feels like a big weight has been lifted. Federal and state governments offer student loan forgiveness for a variety of purposes, including but not limited to encouraging students to pursue certain in-demand professions, work in underserved areas, or moving to work in certain geographical locations. But it’s important to note that your financial burdens aren’t over after your student loans are forgiven.
How are student loan forgiveness and taxes related? Wondering, “is student loan forgiveness taxable?” Unfortunately, yes. You’ll have to pay taxes on student loan forgiveness after the federal government cancels some or part of your loan.
So how do you go about paying the tax on loan forgiveness? We’ll get into everything you need to know about student loan tax forgiveness in this article.
Table of Contents
- The Latest Updates About Student Loan Forgiveness and Taxes 2022-2023
- Is Student Loan Forgiveness Taxable?
- Insolvency and Taxes on Loan Forgiveness
- Why Expert Advice?
The Latest Updates About Student Loan Forgiveness and Taxes 2022-2023
The student loan stimulus relief bill was passed by Congress in March 2021. This plan removed the obligation to pay taxes on loan forgiveness from now until 2025.
However, the old tax law requiring students to pay taxes on student loan forgiveness will come back into effect on January 1, 2026.
So, as you read this article, remember that you won’t have to pay taxes on any student loan forgiveness, even those scenarios that previously necessitated paying tax, until 2026.
Is Student Loan Forgiveness Taxable?
So now that we covered the latest update to student loan forgiveness and tax rules for this year, let’s get into what happens after 2025.
Yes, student loan forgiveness is taxable. The amount of tax you have to pay depends on the amount of your student loan that’s forgiven. Say you achieve a student loan forgiveness amount of $50,000 — the federal government sees that as taxable income.
If you’re working full-time, you already have tax obligations to fulfill. Add on an extra $50K or however much your loan is forgiven, and you might be moved into a higher tax bracket, which demands more taxes owed.
If you receive student loan forgiveness for a closed school, unpaid refund, or false certification, that’s considered taxable income. Now until 2025 however, these scenarios for student loan forgiveness won’t require you to pay taxes until January 1, 2026.
Moreover, any remaining balance forgiven on an income-contingent repayment or income-based repayment plan is taxable after 25 years.
What Types of Student Loan Forgiveness Are Not Taxable?
Now, there are certain types of loan forgiveness that are subject to a student loan forgiveness tax exemption. Any loan repayment or income from public service loan forgiveness isn’t taxable income. Moreover, in 2018, the government made student loan discharges based on disability or death completely tax-free.
On January 1, 2026, when the old tax laws revert regarding student loan forgiveness, the above scenarios will still be exempt from the tax rule. There are loan forgiveness tax consequences if you don’t pay your taxes, including fees, penalties, investigation, and in extreme cases, jail time.
Form 1099-C is an official document sent to individuals by the IRS to document their cancellation or forgiveness of their debt in their taxes.
If you’ve received Form 1099-C, here are some steps you should take:
- Verify the amount in Box 2 and confirm that it’s the amount of your loan that will be forgiven. If the figures don’t match, reach out to the IRS to let them know.
- Consult with a tax professional to maximize any possible benefits that you can acquire to offset the blow of the tax owed
- File your tax return and note the possible tax listed that you’ll owe on your income.
- Pay the tax bill before January 1, 2026, according to the government’s assessment, or file a complaint with the IRS if the amount owed seems inaccurate.
Insolvency and Taxes on Loan Forgiveness
One exception to the obligations of receiving Form 1099-C is if you're insolvent. This means your assets are worth less than your total liabilities. Your student loan forgiveness tax bill might have an opportunity to be reduced if you become insolvent immediately before you achieve student loan forgiveness.
If your student loan forgiveness amount brings you out of insolvency, you still have to pay taxes on it, either partially or fully
However, if your student loan forgiveness does not affect your insolvency, aka your liabilities are still worth more than your assets, you don’t have to pay tax on your student loan forgiveness.
Why Expert Advice?
Taxes are complicated enough without student loan forgiveness or insolvency. It’s best to consult an expert, ideally a bookkeeper or an accountant, to properly understand your tax obligations. They can also give you insight into the latest tax rules as well as ways to mitigate your tax burden.
Think of it this way: an accountant might cost you a couple of hundred dollars, but it’s worth it if you save yourself thousands in taxes down the line.
Are forgiven student loans taxable? Normally they are, but until 2025, you’re off the hook! Make sure you consult with an accountant to learn more about the student loan forgiveness tax and the obligations you have after 2025. Like all income tax, you must pay taxes on loan forgiveness, unless you’re subject to a student loan forgiveness tax exemption as characteristic of certain types of forgiveness.
Interested in learning more about student loan forgiveness? Read our article about the Best Private Student Loan Forgiveness Programs.