Understanding the Tax Implications of Student Loan Forgiveness
If you’re one of the millions of Americans who had their federal student loans forgiven in 2024, you may be wondering about the tax implications. Fortunately, the good news is that you won’t owe any federal taxes on the forgiven debt.
The American Rescue Plan Act of 2021: A Game-Changer
The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. This means that borrowers who had their debt cleared in 2024 won’t owe anything to the federal government. It doesn’t matter which program the loans were forgiven under, whether it’s Public Service Loan Forgiveness, an income-driven repayment plan, or Borrower Defense.
Private Student Debt and Bankruptcy
Even canceled private student debt shouldn’t trigger a federal tax bill, thanks to the terms of the American Rescue Plan. Additionally, student debt forgiven in bankruptcy is never subject to federal or state taxes.
State Taxes: A Possible Exception
While the federal government won’t tax forgiven student debt, some states may still levy taxes on certain types of forgiveness. Currently, a handful of states tax student loan forgiveness, possibly because their state tax code doesn’t conform to the federal one or hasn’t been updated to reflect the American Rescue Plan. It’s essential to check with your state or a tax professional to determine if your relief triggers any state tax liability.
What Happens After 2025?
The American Rescue Plan’s provision is set to expire on December 31, 2025. If it’s not extended or replaced, more states may start taxing forgiven student debt again. Borrowers should stay informed about any changes to the tax policy and plan accordingly.
Stay Informed and Plan Ahead
If you’ve had your student debt forgiven, it’s crucial to understand the tax implications and plan for the future. Stay up-to-date with any changes to the tax policy, and consult with a tax professional if you’re unsure about your specific situation.
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