Is Student Loan Forgiveness Taxable? It Depends... 02-01-25

Is student loan forgiveness taxable? Yes. No. Maybe. Sometimes. It primarily depends on the student loan forgiveness program. But like everything else with student loans, there are a number of other factors at play. Why make it easy when you can thoroughly confuse taxpayers, federal student loan servicers and financial planners for years to come? Listen in to learn when student loan forgiveness might be tax-free and how to prepare your clients for taxable loan forgiveness.

This podcast is meant for entertainment purposes only. For the more thorough, complete, and accurately written version of this article which includes citations, visit us at http://www.tottb.tax

Transcript

Okay. So, if you're listening to this, you're probably thinking about student loan forgiveness. Right? Yep. Very likely.

Especially with all the news lately Yeah. And, maybe even thinking about taking advantage of it yourself. Uh-huh. So you've heard about the programs. Right?

Like, public service loan forgiveness Right. PSLF Yeah. And, or income driven repayment IDR. IDR. But, you know what happens when you get to tax time?

Right. Is this, like, really free money? Yeah. That's that's the big questions. Yeah.

It's not a simple yes or no, though, unfortunately. No. It's more of a, well, it depends kinda situation. Oh, gosh. What's really interesting though is that the whole landscape of student loan forgiveness has changed a lot lately.

Oh, really? And, the potential for it to change even more in the future. Mhmm. That's why this deep dive is so important. Yeah.

Okay. So should we all be, like, saving money just in case? Well, let's, let's break it down. Yeah. Let's start by talking about the different federal forgiveness programs.

There are a lot of different ones. Okay. Yeah. We'll talk about PSLF and IDR in detail. Okay.

But we'll also mention a few others Okay. Like, teacher loan forgiveness Mhmm. Total and permanent disability discharge Okay. And any discharges that are related to specific schools closing down. Oh, wow.

There's also the Perkins loan cancellation. Mhmm. But, those loans aren't even issued anymore. Oh, wow. There are so many different ways to get forgiveness.

There really are. It sounds like it's a lot to keep track of. It is. And that's why we're just gonna focus on PSLF and IDR for this deep dive. K.

Those are the 2 that are always in the news. Mhmm. And they're the ones that are always being debated. Yeah. Plus they're good examples of the 2 main types of student loan forgiveness.

Okay. 1 that's based on your service Mhmm. And the other that's tied to your income. So let's just, like, get right to it. Sure.

If you get your loans forgiven Yeah. Does that mean you're gonna have to pay taxes later? Well, the general rule from the IRS is that any canceled debt Mhmm. Is treated as taxable income. Oh.

So let's say you have, I don't know, $30,000 in student loans Yeah. That are forgiven. Mhmm. That amount could be added to your taxable income for that year. So it's not really like a get out of debt free card then.

It's more like Yeah. Get out of debt and maybe pay some of it back in taxes. Well Yeah. There are some exceptions to that rule. Oh, okay.

For example Yeah. PSLF is always tax free. Oh, really? Yeah. This isn't just temporary.

Okay. It's actually written into the IRS code. Oh, okay. Well, that's good. Yeah.

That's a relief for people in public service. Right. You know, that kind of work should be rewarded. Yeah. It shouldn't be, like, undermined by a tax burden.

Exactly. And there's another big exception right now. Oh, okay. Because of the American Rescue Plan Act Okay. All student loan forgiveness Mhmm.

Including IDR is tax free through the Oh. And this applies to both federal and private loans. That's a pretty long time. It is. So anyone who gets their loans forgiven this year or next year Uh-huh.

They don't have to worry about a federal tax bill. Exactly. Oh, okay. But Yeah. That's also why it's important to understand that this is temporary.

Okay. After 2025, things could change. Oh, gosh. So it's like a ticking time bomb. Some people are calling it that.

Oh, wow. When IDR forgiveness becomes taxable again Mhmm. After 2025 Okay. A lot of borrowers could end up with a really big tax Oh, no. That they weren't expecting.

Oh, gosh. Yeah. So even if someone's planning to get forgiveness before 2025 Mhmm. What if their plans change Right. Or something happens Yeah.

And they can't do it. Mhmm. Then they're kinda stuck. Exactly. Yeah.

That's why it's so important to plan ahead. Okay. Even if things are uncertain. Mhmm. Even if you just save a little bit Yeah.

It can really help. Yeah. If you have to pay a big tax bill later on Okay. It's like insurance Okay. For your finances.

So, like, what can people do to get ready for this, Right. This tax bomb? Well, especially if they're thinking about IDR forgiveness after 2025. There are a few things you can do. Okay.

1 thing is to use a student loan forgiveness calculator Okay. That can give you an idea of how much you might owe in taxes Okay. Based on your loans and your income. Okay. And another thing you could do is just set aside a little bit of money each month.

Mhmm. Like, even a hundred dollars Okay. Over a few years. Yeah. That can add up.

Yeah. That makes sense. It's a lot easier than trying to come up with a big lump sum all at once. Yeah. You're right.

Small steps. Exactly. Yeah. It's about creating a safety net. Okay.

And then there's another thing to think about. Oh, what's that? State taxes. Oh, yeah. Federal taxes are 1 thing.

Mhmm. But state taxes are a whole other thing. Oh, right. Each state has its own rules. Right?

So we can't just assume that they're gonna follow the federal rules. No. Unfortunately not. Oh. It's different all over the country.

No. But there is some good news. Okay. What's that? 9 states don't have any income tax at all.

Oh, wow. So if you live in 1 of those states, you're good. Oh, that's great. And then most of the other states Okay. They don't tax forgiveness right now.

Oh, okay. They're following the federal guidelines. So for most people Yeah. They're safe from state taxes for now? For now.

Yeah. Okay. But things could change after 2025. Right. Exactly.

For sure. And each state has its own rules. Yeah. So you really need to check the rules for your state. So even if someone thinks they understand the federal rules Mhmm.

They still need to check their state rules. Yeah. Especially if they live in a state where things could change. And what about the states where it is taxable? Right.

Well, there are 5 states where forgiveness is taxable right now. Okay. Which ones? Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin. Okay.

So what should people in those states do? Well, the first thing is don't panic. Okay. The best place to get information is your state's department of revenue. Oh, okay.

They can give you specific guidance for your situation. So, like, go to their website Exactly. And just see what it says. Yeah. Just to get a sense of what the rules are.

Yeah. Is there anything else they should be looking for? 1 thing to pay attention to is how they treat different types of forgiveness. Okay. Like, IDR forgiveness might be treated differently than disability discharge.

Oh, so even within those 5 states Right. There are still variations Exactly. Depending on the program. Yeah. It's a lot to keep track of.

It really is. Yeah. Especially if you have a complicated situation Yeah. Or if you're not comfortable figuring it out on your own Mhmm. In those cases.

Tax adviser. That's good advice. Yeah. You know? It's always a good idea to get professional help with taxes.

Yeah. Especially when it's something complicated like this. Yeah. They can make sure you're doing everything right. Exactly.

Yeah. And that you won't get any surprises later. Exactly. Yeah. Good advice.

Thanks. It seems like in those 5 starts where forgiveness is taxable Yeah. Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin Mhmm. What makes them approach it differently? That's a good question.

Yeah. And, unfortunately, the answer isn't that simple. Oh. Each state has its own laws about taxes, and they each interpret the federal guidelines in their own way. Oh, okay.

It's not like there's 1 rule that applies everywhere. So you can't just say, like, all forgiveness is taxable in those 5 states. Yeah. It's not that simple. Oh, gosh.

Some states might only tax certain types of forgiveness Okay. Like IDR, but not PSLF. Okay. Or they might have different rules for different programs. Oh, wow.

And even within those states Yep. The rules can change. It's like you're trying to figure out a maze Right. But you're blindfolded. It can definitely feel that way.

Yeah. That's why it's so important to check with your state's department of revenue. Okay. They have the most up to date information. Mhmm.

And they can tell you what applies to you. So for people in those 5 states Yeah. Step 1 is go to the website Right. And do some research. Exactly.

What should they be looking for specifically? Well, 1 thing to pay attention to is how they treat different types of forgiveness. Okay. We talked about that earlier. Yeah.

IDR and disability discharge might be treated differently Okay. Even in the same state. So even in those 5 states where it's taxable Yeah. There are still variations Mhmm. Depending on the program.

Right. It's a lot to keep track of. It is. Yeah. It seems like it would be really helpful to have a tax adviser.

Yeah. Definitely. Especially in those states where it's more complicated. Absolutely. Yeah.

Just to make sure you're doing everything right. Right. Yeah. It's all about peace of mind. Yeah.

And avoiding any surprises later on. Okay. So we've covered a lot. We have. Yeah.

Let's do a quick recap. Okay. We talked about the main federal forgiveness programs Uh-huh. Like PSLF and IDR. Right.

PSLF is always tax free Yeah. Which is great. Yeah. And IDR is tax free until the end of 2025 because of the American Rescue Plan Act. Right.

But after 2025 Yeah. Things are a little more uncertain. Yeah. That's when we have the potential tax bomb. Yeah.

That sounds scary. It is something to be aware of. Yeah. Even though it's a few years away. Yeah.

It's probably a good idea to start planning now. I agree. Yeah. We talked about using those student loan calculators to figure out how much you might owe in taxes. Right.

And we talked about setting aside a little bit of money each month. Yeah. Even a small amount can make a difference. Yeah. Those small steps can really add up.

They can. And then, of course, we talked about state taxes. Right? Most states are following the federal guidelines. Yeah.

For now. But there are those 5 states Uh-huh. Where forgiveness is taxable. Right now. Yeah.

So for anyone listening in those states Mhmm. We recommend checking with your state's department of Revenue. Yes. Definitely. And maybe even talking to a tax adviser.

If you need to. Knowledge is power. Right? It is. The more you know Mhmm.

The better decisions you can make. Absolutely. Yeah. For yourself and your family. Yeah.

It's important to be informed. Okay. So we've been talking a lot about the details. Mhmm. You know, the programs and the taxes.

Right. But it's important to remember why these programs exist in the first place. Yeah. It's easy to lose sight of the bigger picture. Exactly.

Yeah. They're designed to help people who are struggling with student loan debt Yeah. So they can get back on their feet and achieve their goals Right. Without being crushed by their loans. It's about people's lives.

Yeah. And their futures. It's not just about numbers and rules. Right. It's about real people.

Yeah. And that's something worth fighting for. Definitely. Yeah. Even if it means dealing with a complicated tax system.

Yeah. It's about making sure these programs actually work. Exactly. Yeah. So as we wrap up this deep dive, we wanna leave you with a question.

Okay. With student loan forgiveness being such a hot topic Yeah. And with the possibility that the tax rules could change Mhmm. What impact do you think these tax rules will have on the future of these programs? Yeah.

Will it make people less likely to apply for forgiveness? Right. Or will it lead to changes in the programs themselves? That's a good question. Yeah.

Or could it lead to even more debate Mhmm. About how to make a system Yeah. That supports borrowers Mhmm. And makes higher education more accessible? Those are some big questions.

They are. Yeah. And I don't think there are any easy answers. I agree. But it's definitely something we all need to think about Right.

And talk about. Yeah. As these policies continue to evolve Yeah. It's important to stay informed Mhmm. And stay engaged Yeah.

And keep asking questions. Yeah. Because this is an ongoing conversation. It is. Yeah.

And your voice matters. Absolutely. Yeah. It's important to remember the people. Mhmm.

You know, the human side of all of this and how all of this affects people's access to education Yeah. And their economic well-being. It's about more than just the money. Right. It's about people's lives.

Exactly. And that's why it's so important to have these conversations Mhmm. To help people understand what's really going on Yeah. And what the potential consequences are. Both good and bad.

Exactly. Seems like the more you know Yeah. The better off you'll be. Absolutely. You can make better decisions Right.

For yourself and your family. Knowledge is power. Exactly. And speaking of empowerment Yeah. We haven't really talked about advocacy.

Right. You know, it's not just about understanding the rules. It's about maybe trying to change them. That's a great point. Yeah.

It's not just about accepting things as they are. Uh-huh. We can actually try to make things better You can. For borrowers. There are a lot of people out there Okay.

Who are working to make these programs better Okay. And to make sure the tax rules aren't too burdensome. So if this is something you care about? Yeah. You can get involved Absolutely.

And actually make a difference. Your voice matters. Yeah. Collective action can really make a difference. They can.

Whether it's supporting an organization Yeah. Or contacting your lawmakers Ah. Or even just sharing your own story. Right. All of those things can help.

It's a good reminder that we're not just bystanders. We're not. Yeah. We can actually be part of the process. Exactly.

Yeah. So as we wrap up this deep dive Okay. We encourage you to keep learning. Yeah. Keep asking questions Mhmm.

And keep engaging in this conversation. We've covered a lot today. Yeah. We have. We talked about all the different forgiveness programs and the potential tax bomb after 2025.

Right. And we talked about the importance of of checking your state's rules Yeah. And maybe even talking to a tax adviser. If you need to And most importantly, we talked about advocating for change. Absolutely.

Yeah. So hopefully, this deep dive has been helpful. I hope so. Yeah. Hopefully, you understand things a little better now.

Yeah. And that you feel more confident about navigating this whole process. Remember, you're not alone in this. Right. There are resources available to help you.

So until next time. Yeah. Stay curious. Stay informed. And stay engaged.

Your journey towards financial freedom is worth it. Absolutely.