Public Service Loan Forgiveness allows borrowers to get certain federal student loans forgiven for working in nonprofit or public careers after making at least 120 total “qualifying payments” over at least 10 years.
The TPD Discharge was traditionally a taxable form of student loan forgiveness, which was problematic for some disabled borrowers who would wipe out their debt, only to then be hit with an unaffordable tax bill. But a federal tax law passed by Congress in 2017 exempts TPD Discharges from federal taxation through 2025.The Borrower Defense to Repayment program can cancel the federal student loan debt for borrowers who were defrauded by their school.
Private student loan cancellation — which is rare, but may occur in situations where the borrower negotiates a settlement to resolve the debt for less than the full balance owed — may be taxable. However, there is also a provision in the American Rescue Plan Act that would appear to temporarily exempt private student loan cancellation from taxation, too.
But some states may treat student loan forgiveness differently for tax purposes than the federal government. And that tax treatment may vary depending on the state, the type of loan forgiveness, and when the loan forgiveness occurred.Borrowers who obtained student loan forgiveness in some form in 2021 and are getting ready to do their taxes this year should consider consulting with a qualified tax advisor if they have any questions about their potential tax liability.
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