If you follow the rules of programs like Public Service Loan Forgiveness, Teacher Loan Forgiveness, and similar federal loan programs, any loan forgiveness you receive should not be taxable.
The IRS considers canceled debt, including most forms of student loan debt forgiveness or student loan discharge, to be taxable income. However, borrowers working toward loan forgiveness have been exempt from taxes thanks to the American Rescue Plan Act of 2021.
You can likely receive a tax break when you start paying off your student loans, and there are also a few tax credits for current students. Student loan payments can reduce your taxable income by up to $2,500 and, if you're still in school, give you a tax credit of up to $2,500.
Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it. Due to a combination of family income, generational wealth, and other factors, student loan debt is disproportionately held by Black borrowers compared to their White counterparts.
Student loan debt can lower your credit score, especially if you fail to make on-time payments. Student debts may be forgiven under certain circumstances, but almost never if they are in default.
Among the economic benefits of student loans is that they allow more people to get a higher education. But there are definitely negative effects of student loans as well, including tamping down spending and dragging on overall growth.
The student loan interest deduction is an “above the line” deduction, meaning it reduces your taxable income. If you are in the 22% tax bracket and you are able to take the full $2,500 tax deduction, it could save you $550 in taxes.
When filing taxes, don't report your student loans as income. Student loans aren't taxable because you'll eventually repay them. Free money used for school is treated differently. You don't pay taxes on scholarship or fellowship money used toward tuition, fees and equipment or books required for coursework.
If you made federal student loan payments in 2023, you may be eligible to deduct a portion of the interest paid on your 2023 federal tax return.
Additionally, the cancelation of these loans is fundamentally unfair. It will occur at the expense of Americans who have worked hard, repaid their debts or chosen not to go to college at all. In a country that has always rewarded hard work and personal responsibility, this move is, quite simply, unprecedented.
Since the student loan cancellation program is unfunded, all else equal there won't be any additional future revenues to offset this increase. Thus, the real burden has to decline. This is achieved by an increase in the price level.
Meanwhile, student loan amounts forgiven through fixes in the Public Service Loan Forgiveness (PSLF) program are not considered income for tax purposes, according to the IRS. The relief won't be taxed by the federal government, but some individual states may tax it.
Borrowers who have reached 20 or 25 years (240 or 300 months) worth of payments for IDR forgiveness may see their loans forgiven in Spring 2023. ED will continue to discharge loans as borrowers reach the required number of months for forgiveness. All other borrowers will see their loan accounts updated in 2024.
Proponents argue that large-scale debt cancellation would help advance racial and socioeconomic equality and boost the economy. Without the burden of student loans, they say, more people will be able to buy homes, take entrepreneurial risks, or save for retirement.
Many students borrow money or accept grants and scholarships to help pay for higher education. Fortunately, student loans aren't taxable, so you don't report student loans as income on your tax return, and you don't have to pay taxes on certain types of financial aid.
Generally, student loans are not considered income, so they are not taxed. The exception is when some or all of your student loan balance is forgiven. In some cases, the IRS may count the canceled debt as taxable income. Educational grants and scholarships, on the other hand, may or may not count as income.
Do I need to claim my student loan refund from the Student Loan Debt Relief Plan as income? A provision in the 2021 American Rescue Plan Act, student loan forgiveness will not be taxable even if you receive a refund for federal tax purposes. However, some states may require tax to be paid on the canceled loan debt.
(updated December 22, 2023) All or part of your refund may be offset to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans.
If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won't be subject to federal income taxes, it may still be taxed at the state level.
Soaring college costs and pressure to compete in the job marketplace are big factors for student loan debt. Student loans are the most common form of educational debt, followed by credit cards and other types of credit. Borrowers who don't complete their degrees are more likely to default.
"The truth is these loans are very complicated financial instruments… have compounding interest, which means that you could start paying down your debt right after college, but the interest is so high it multiplies and becomes impossible to get out from under it," Zeff said.