Will My Student Loan Forgiveness Be Taxed In 2023?
Will My Student Loan Forgiveness Be Taxed In 2023?
by
December 23, 2022
95% of student loan borrowers, or roughly 45 million people, are expected to benefit from Biden’s student loan forgiveness plan proposed in 2022. Are you one of the millions of Americans with student loan debt? Are you wondering whether it will be forgiven this year and what that could mean for your tax bill?
Don’t worry; we’ve got all the answers about student loan forgiveness in 2023. From the facts and figures surrounding taxation to the options available for possibly reducing your debt burden, let’s dive straight into taxes on loan forgiveness and whether or not student loan forgiveness is tax-free.
What Is Federal Student Loan Forgiveness?
President Joe Biden recently announced federal student loan forgiveness for borrowers who meet the income requirements. Those who qualify could have up to $20,000 of federal student debt forgiven. This is a significant financial win for many federal student loan borrowers, especially those that received Pell Grants.
The federal government estimates this will eliminate debt for nearly 25% of people with federal student loans. About 8 million borrowers who are having trouble repaying their federal student loans will be eligible to have part or all of the balance canceled.
Why is this such a big deal? Student loan forgiveness can be a powerful tool in helping people pay off their education-related debts and move forward into their future without the burden of hefty interest rates or sky-high student loan debt bills on their shoulders.
Is Student Loan Forgiveness Taxable?
The current federal tax law provides a tax benefit for students who take out loan forgiveness programs. Through the end of 2025, any student debt discharged by the federal government will not be subject to federal income tax.
This tax relief is an exemption from the tax rate on loan forgiveness, meaning no borrower will have to pay taxes on their debt. However, after January 1st, 2026, borrowers should familiarize themselves with their tax bracket, which determines how much they'll have to pay if their loan is forgiven.
Overall, borrowers must understand tax rates and regulations regarding student loan forgiveness to know how much they may be taxed. For example, some states are considering having student loan forgiveness charged as taxable income.
These 7 States May Tax Your Student Loan Forgiveness
With more and more states introducing tax policies on student loan forgiveness, there needs to be more clarity about them. Although the federal government has agreed not to count student loan debt forgiven through Dec. 31, 2025, as taxable income, do other states do the same?
Currently, no. Seven states are considering taxing your student loan forgiveness, including:
- Arkansas
- California
- Indiana
- Minnesota
- Mississippi
- North Carolina
- Wisconsin
How much are you taxed on student loan forgiveness? Typically, the tax rate for this type of loan forgiveness is the same as the state’s income tax rate. If the federal government forgave $10,000 in student loans, you’d have to pay $323.
Fortunately, federal tax law currently dictates that all loans discharged through private activity, a governmental program, or payment to an individual do not count as income. Furthermore, you’re not required to include private student loans in your annual tax return when they are discharged due to the death or disability of the borrower.
As you can see, student loan forgiveness may come with clauses depending on where you live. So, it’s best to research before applying for or accepting student loan forgiveness through this federal program.
Consult With a Professional If You Pursue Student Loan Forgiveness
If you live in a state that might tax your forgiven student loans, consulting with a tax professional is essential before accepting loan forgiveness from the government. A tax specialist can advise you on the different implications of your loan forgiveness and help ensure that you understand any potential consequences.
An online tax calculator is also helpful for understanding how much you may need to save for taxes. Many state Department of Revenue or franchise tax board websites have readily available calculators. However, the bottom line is that the calculator results are only estimates, so it pays to consult a professional for more accurate information.
Improve Your Finances With Cheers
So, is student loan forgiveness taxable? The federal government has no plans to tax student loan forgiveness through 2026. However, lawmakers have tried to block student loan forgiveness and tax it at the state level. We suggest staying up to date on financial news to ensure you’re aware of any changes.
While you wait to see what happens with Biden’s student loan forgiveness plan, it’s great to focus on improving your general finances outside of student loans. For example, now’s a great time to improve your credit score.
At Cheers, we make credit building easy for you. With our credit builder loan, all you have to do is get started and let our autosave feature take care of the rest. Every month, we’ll report your on-time payments to the credit bureaus, so you can work towards your credit goal while building up your savings.
Plus, you will get your deposit back minus the interests after the loan mature. Get started today and benefit from credit building made simple.
