Will You Be Taxed On Student Loan Forgiveness In 2023? Key Details

Student loan forgiveness has been in the news for over year, as the Biden administration has initiated multiple student debt relief programs including one-time or temporary waivers, an extension of the ongoing student loan pause, and an expansion of existing loan forgiveness programs. Over $24 billion in student loan forgiveness has been issued under the Limited PSLF Waiver alone.

But as tax season rapidly approaches, the tax landscape for student loan forgiveness is as confusing as ever. Here’s what borrowers need to know.

Background: Student Loan Forgiveness Can Be Taxable

Whenever any kind of debt (including student loan debt) is forgiven, cancelled, reduced, or discharged, there could be tax consequences for the borrower. A lender would issue the debtor a Form 1099-C, which is a tax form showing the amount of the cancelled or forgiven debt. The form is issued during tax season for the prior year when the cancellation event occurred. So if you had a debt forgiven in 2022, you might receive a Form 1099-C in early 2023. The form, which is also sent to state and federal taxing authorities, requires the borrower to report the cancelled debt on their tax return as “income.” This can result in higher income taxes.

Federal law has historically provided certain taxation exemptions for cancelled debt. For instance, in some cases the borrower may be able to claim that the debt is invalid or disputed. For situations where the borrower’s total debts exceed their total assets at the time of cancellation, the borrower may be able to demonstrate insolvency, which can reduce or eliminate any resulting tax liability.

But while general debt cancellation often results in the issuance of a Form 1099-C and it could be taxable, student loan forgiveness is more complicated, especially right now.

Federal Student Loan Forgiveness Is Temporarily Tax Exempt

Federal student loan forgiveness, cancellation, and discharge is temporarily not taxable under federal law. The American Rescue Plan Act of 2021 exempted federal student loan forgiveness from taxation at the federal level until the end of 2025. This includes federal student loan forgiveness under the following programs:

While the American Rescue Plan Act of 2021 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. It is possible in certain situations that a borrower could incur state taxation as a result of student loan forgiveness, even if it is not taxed federally.

Some Federal Student Loan Forgiveness May Be Taxable In the Future

While all federal student loan forgiveness is temporarily tax-exempt at the federal level, this is temporary under the provisions of the American Rescue Plan Act of 2021. Unless Congress extends those provisions or makes them permanent through new legislation, the tax relief expires at the end of 2025.

After that, the federal tax treatment of student loan forgiveness would revert back to how it was prior to the Act’s passage. Under this prior tax regime, profession-based student loan forgiveness such as PSLF was not taxable under federal law. And the IRS had issued prior guidance stating that loan discharges under the Borrower Defense to Repayment program would not be taxable federally, either. But student loan forgiveness under Income-Driven Repayment (IDR) plans would become taxable starting in 2026.

Taxation of discharges under the TPD Discharge program for disabled borrowers is not taxable under separate tax legislation passed by Congress in 2017. But this, too, expires at the end of 2025. If Congress does not renew or extend this relief, TPD discharges could be taxed federally starting in 2026.

Private Student Loan Forgiveness and Cancellation Could Be Taxable

Private student loans are not eligible for federal student loan forgiveness and relief programs like PSLF, IDR, or Borrower Defense to Repayment. However, private student loans can occasionally be discharged in certain cases, such as if the borrower is disabled or dies. And defaulted private student loans can sometimes be settled for less than the amount owed, resulting in partial cancellation.

Any form of private student loan cancellation could be taxable. The American Rescue Plan Act of 2021 does include a tax exemption provision that applies to “any private education loan (as defined in section 140(a)(7) of the Truth in Lending Act)” through 2025. However, it is unclear if this applies to every private student loan, or every private student debt discharge or reduction event, such as a negotiated settlement. And the IRS has not issued clear guidance.

Borrowers Should Consult With A Qualified Tax Professional

Given the intersections of student loan forgiveness with federal and state law, borrowers who received student loan forgiveness, discharges, cancellations, or reductions in 2022 (or expect to receive it in 2023) should consult with a qualified tax professional, such as a Certified Public Accountant (CPA) or tax attorney. It’s critical for borrowers to understand their legal rights and obligations to avoid costly errors in tax reporting.

Further Student Loan Forgiveness Reading

Student Loan Forgiveness: These Deferment And Forbearance Periods May Count

Here’s What You’ll Pay, And When You’ll Get Student Loan Forgiveness, Under Biden’s New Plan

Your Student Loan Forgiveness Is Getting Delayed, And It May Get Worse

Big Student Loan Forgiveness Update As Education Department Clarifies Eligibility For One-Time Adjustment