Will You Be Taxed On Student Loan Forgiveness In 2023? Key Details

President Biden’s one-time student loan debt relief initiative of up to $20,000. This program is currently blocked due to legal challenges, but the Supreme Court isWhile the American Rescue Plan Act of 2021 exempts federal student loan forgiveness from federal taxation, it does not necessarily exempt borrowers fromincome taxes.

. It is possible in certain situations that a borrower could incur state taxation as a result of student loan forgiveness, even if it is not taxed federally.While all federal student loan forgiveness is temporarily tax-exempt at the federal level, this is temporary under the provisions of the American Rescue Plan Act of 2021. Unless Congress extends those provisions or makes them permanent through new legislation, the tax relief expires at the end of 2025.

After that, the federal tax treatment of student loan forgiveness would revert back to how it was prior to the Act’s passage. Under this prior tax regime, profession-based student loan forgiveness such as PSLF was not taxable under federal law. And the IRS hadstating that loan discharges under the Borrower Defense to Repayment program would not be taxable federally, either. But student loan forgiveness under Income-Driven Repayment plans would become taxable starting in 2026.

Taxation of discharges under the TPD Discharge program for disabled borrowers is not taxable under separate tax legislation passed by Congress in 2017. But this, too, expires at the end of 2025. If Congress does not renew or extend this relief, TPD discharges could be taxed federally starting in 2026.Private student loans are not eligible for federal student loan forgiveness and relief programs like PSLF, IDR, or Borrower Defense to Repayment.

Any form of private student loan cancellation could be taxable. The American Rescue Plan Act of 2021 does include a tax exemption provision that applies to “any private education loan of the Truth in Lending Act)” through 2025. However, it is unclear if this applies to every private student loan, or every private student debt discharge or reduction event, such as a negotiated settlement. And the IRS has not issued clear guidance.

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