Student debt has increased a great deal over the decades. This has led more and more people to seek out ways to help pay off their student loans. However, along with debt cancellation, you may ask the question: “Is student loan forgiveness taxable?”
If you have been following the news over the past few months, you may have heard something about student loan forgiveness. It is a complex topic with a lot of considerations. In this article, we'll break down exactly how this will impact your taxes and what you can do to make sure your tax situation stays as simple as possible.
What Is a Student Loan Forgiveness Tax?
Student loan forgiveness is a viable option for those struggling with the burden of their student debt. Prior to having Biden’s American Rescue Plan in place, only a few exceptions could be applied when it came to taxes placed on student loan forgiveness.
The only time your student debt cancellation income can be excluded from taxes is through public service loan forgiveness. This is a type of arrangement wherein your cancellation of debt (COD) income will not be taxed if you work for a certain amount of time in your particular profession. You must work full-time in the government sector, a nonprofit organization, or a public service corporation. The condition is that these agencies must be areas of high unemployment or underemployment.
Public service loan forgiveness is thus not taxable. With this type of loan forgiveness, you will be able to have your remaining debt forgiven after 10 years of payments. If there’s a remaining balance after 25 years, then that will be considered taxable — but what happens when the student loan forgiveness tax provision gets approved?
What Student Loan Forgiveness Means for Your Taxes
There is no official news about student loan forgiveness as part of Biden’s American Rescue Plan unveiled in January. It’s good to know the implications if it will soon become part of the government’s measures to improve people’s circumstances due to the pandemic. One of these implications concerns how student loan forgiveness means for taxes.
An important provision included in the American Rescue Plan, signed into law last March, is for student loan forgiveness to be tax exempt. Prior to this, any forgiven debt would have meant an additional taxable income. If this plan soon includes non-taxation of student debt, then you won’t have to pay taxes for it.
To illustrate, if you have $10,000 of your student loan forgiven in 2021, that amount will be part of your reported income — your COD income on top of your taxable income. This is the amount that will be taxed for the year. If Biden’s tax update on student loan forgiveness gets approved, then any forgiven student debt will be tax free.
Something To Look Forward To
If the tax provision on student loan forgiveness in the American Rescue Plan will be in place, we definitely have a lot to look forward to. If you are struggling with student debt and would like to apply for federal forgiveness programs, get started with Chipper here to find the forgiveness plan you deserve