A common borrower question is if they are in a student loan forgiveness program will they be taxed. The tricky part of this question is determining what the borrower means by “student loan forgiveness.” There are a lot of different programs out there that fit underneath this umbrella term. Here are the main groups of student loan forgiveness programs available.
Federal Programs That Are Career Based
Programs like the Public Service Loan Forgiveness (PSLF), repayment programs for lawyers and teachers, as well as the National Health Service Corps loan repayment assistance are typically what people mean when referring to student loan forgiveness. These programs are not taxable under the current IRS code. However, this would appear to be the exception, for other types of student loan forgiveness are taxable.
Cancellation and Discharge
These programs are considered taxable income. The most common programs under this circumstance include cancellation for closed school, false certificate of the loan, unpaid refund of the loan, and discharge for death or disability. You will end up paying taxes on the amount of student loan forgiven.
Repayment Plans with Forgiveness After a Certain Amount of Time
Income-based repayment plans, such as IBR, PAYE, REPAYE, and income-contingent programs are all considered taxable. This is something that many borrowers aren’t aware of when they select one of these programs. These are very attractive programs for many who are looking for help with payments, however, after the 20-25-year period of the program, the remaining balance is considered taxable income. So, if you have made payments for 25 years and you still have a balance of $40,000, that amount will be taxed at the federal and state levels.
Repayment Assistance Programs
As we mentioned with federal programs, certain professions have repayment assistance that is tax free. However, it is important to know the circumstances of your repayment assistance programs. In some cases, an assistance program at the state level may be tax exempt but won’t be at the federal level. Thanks to thecollegeinvestor.com, you can use their state-by-state interactive map to learn if your program has any special circumstances that you need to be aware of.
Make Sure You Understand Your Program Completely
As you can see, there is a bit of complexity when trying to define if student loan forgiveness is taxable or not. It is your responsibility and in your own best interests to make sure you understand the nuances of the program you select. Don’t take it at face value and really research what you are getting into so you aren’t surprised by a hefty tax bill later down the line.