Will Student Loan Forgiveness Affect Your Taxes?

Student loan forgiveness is again a hot topic of discussion after President Joe Biden announced his new three-part plan.

So, if you’re eligible for forgiveness, will your taxes take a hit?

Federally, probably not.

But depending on what state you live in, maybe.

Here’s the breakdown:

• If you got a Pell grant to go to college and make less than $125,000 (or, again, $250,000 if you’re married), the government will cancel up to $20,000 of your debt.
• No Pell Grant? You get $10,000 wiped off the books, provided you meet those same income requirements.

Normally, the IRS would treat that debt forgiveness as taxable income. But loans canceled under the new program are supposed to be exempt from federal taxes.

The key word there, though, is federal.

If you live in one of the nine states that don’t have an income tax — like South Dakota or Wyoming — you probably won’t owe state taxes.

But unless states with an income tax make changes to their laws before the 2023 tax filing year, you might be looking at a state tax bill.

In addition to forgiveness, the new plan will continue the pause on federal student loan repayment until Dec. 31, 2022. Also, low-income borrowers are supposed to have their monthly payments capped at 5% of their discretionary income.

There are still a lot of details to work out under the new plan — like when all this forgiveness will start and how the income requirements will work. So, watch our blog for future updates.

Other questions about how student loans might be affecting your taxes? Let us know.