Student Loan Forgiveness & Tax Implications
If your student loans are forgiven, you may owe taxes on the canceled balance.
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Student loan forgiveness cancels your student loan debt — or what’s remaining of it. While this certainly comes with some significant financial benefits, it also has an often unexpected side effect: Higher taxes.
That’s only in some cases, though. If you think you may be eligible to have your student loans forgiven, use this guide to determine its impact on your tax returns (and how to prepare for it).
In this guide:
- When does a “student loan forgiveness tax bomb” get triggered?
- How much will I owe in taxes from forgiveness?
- Ways to prepare for student loan forgiveness taxes
- Are there any plans to change these taxes?
When does a “student loan forgiveness tax bomb” get triggered?
When a student loan is forgiven, the balance canceled is often considered “income” — as if the borrower was physically given money to pay off the loan. Since income is taxable, this often results in what many call a “student loan forgiveness tax bomb,” a significant jump in the income taxes the borrower owes for that year.
Fortunately, not all types of forgiveness are taxable. Here are some of the exceptions:
- Your loans were forgiven under the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs
- The loans were discharged due to the borrower’s death or permanent disability
- The school closed while you were enrolled
- Your school defrauded you
You will typically only need to pay taxes on your forgiven balance if you’re on an income-driven repayment plan. These allow your balance to be forgiven 20 to 25 years into your plan. If your forgiveness is taxable, you should receive a 1099-C to report the forgiven balance.
How much will I owe in taxes from forgiveness?
If your loan forgiveness is taxable, the exact bill will depend on several factors, including your income, tax bracket, filing status, and more. The forgiveness could also push you into a higher tax bracket, resulting in even more taxes due come filing time.
Here’s an example. Say you’re a single filer making $60,000. You claim the standard deduction of $12,400, putting you at $47,600 in taxable income — the 22% tax bracket. In this scenario, you’d owe $6,262 in income taxes.
If you had student loans forgiven, though — let’s say $40,000 of them — then that’d add $40,000 to your taxable income, taking you up to $87,600 and the 24% tax bracket. In this case, you’d owe $15,103.50 in income taxes — the difference of nearly $9,000.
|Single-filer Tax bracket||Taxable income||Total tax bill|
|10%||$0 to $9,875||10% of taxable income|
|12%||$9,876 to $40,125||$987.50 plus 12% of the amount over $9,875|
|22%||$40,126 to $85,525||$4,617.50 plus 22% of the amount over $40,125|
|24%||$85,526 to $163,300||$14,605.50 plus 24% of the amount over $85,525|
|32%||$163,301 to $207,350||$33,271.50 plus 32% of the amount over $163,300|
|35%||$207,351 to $518,400||$47,367.50 plus 35% of the amount over $207,350|
|37%||$518,401 or more||$156,235 plus 37% of the amount over $518,400|
|Married Filing Jointly Tax bracket||Taxable income||Total tax bill|
|10%||$0 to $19,750||10% of taxable income|
|12%||$19,751 to $80,250||$1,975 plus 12% of the amount over $19,750|
|22%||$80,251 to $171,050||$9,235 plus 22% of the amount over $80,250|
|24%||$171,051 to $326,600||$29,211 plus 24% of the amount over $171,050|
|32%||$326,601 to $414,700||$66,543 plus 32% of the amount over $326,600|
|35%||$414,701 to $622,050||$94,735 plus 35% of the amount over $414,700|
|37%||$622,051 or more||$167,307 plus 37% of the amount over $622,050|
To determine how much you’d owe in student loan forgiveness taxes, add up your forgiven loan balance and your annual income, minus any deductions. The standard deduction is $12,400 for a single-filer and $24,800 for married couples filing jointly. If you have children, you can also deduct $1,100 per child. Then, use the above table to calculate your annual tax bill after the loans are forgiven.
Keep in mind that this is just for your federal taxes. Your loan forgiveness could impact your state tax bills, too (though not all states require an income tax). You’ll want to consult your tax advisor for state-specific guidance.
Ways to prepare for student loan forgiveness taxes
Using the above formula to estimate the potential tax impact can help you better prepare for it.
Once you know what sort of bill to expect, you can:
- Start saving. Set aside a small portion of your paychecks each month in an interest-earning savings account. You could also consider a round-off app like Acorns to help pad your savings too.
- Switch to a different repayment plan. REPAYE — or the Revised Pay as You Earn plan — reduces the interest you pay and can help you lower the forgiven balance you’ll eventually owe taxes on.
- Work with your tax advisor on filing strategies. Your tax advisor may be able to reduce your taxable income with certain deductions and write-offs, especially if alerted early.
Are there any plans to change these taxes?
The latest COVID-19 pandemic relief bill — dubbed the American Rescue Plan — actually pauses taxes on all forgiven student loans through 2025. The pause applies to both federal and private loans, as well as those forgiven earlier this year.
There’s no telling if the pause will continue once 2026 rolls around, but the current administration has had student loan forgiveness in its sights since the campaign trail. This could be a strong indicator that student loan repayment policies will continue to change as President Biden’s term goes on.
Author: Aly Yale