Student Loan Forgiveness has been a hot-button issue since the 2016 Presidential election. But with President Biden’s new Student Loan Forgiveness Program unveiled, it’s exploded into a headline-dominating debate.
Interestingly, Biden’s proposal is receiving political criticism from both sides of the aisle. Predictably, Republicans are roundly opposed to the President’s plan. But many democrats are chiming in, too, pointing out that such a massive debt cancellation measure could wipe out the financial benefits of the recently passed Inflation Reduction Act.
Public opinion on Biden’s loan forgiveness program remains mixed. Unsurprisingly, younger folks favor the plan more than those hailing from older generations.
But the new program’s most salient criticism is that while PLSF helps current borrowers, it does nothing to address the giant pink elephant in the room: The ridiculously exorbitant cost of higher education.
Because, as many have observed until skyrocketing tuition costs are addressed, loan forgiveness merely kicks the can further down the path, leaving future administrations to solve the real problem.
Regardless of where you stand in the Student Loan Forgiveness debate, it’s important to note there are potential tax implications associated with this new program. So, let’s take a closer look at the new plan’s details and how it may impact your taxes.
Student Loan Forgiveness Program Overview
The Public Service Loan Forgiveness (PLSF) program entitles qualifying students to “loan forgiveness,” ranging from $10,000 to $20,000.
Students who received a Pell Grant, financial aid available to families in lower income brackets, are eligible for up $20,000 in loan forgiveness. While students who did not receive Pell Grants are eligible for a maximum of $10,000 in loan forgiveness.
Who Qualifies For Student Loan Forgiveness?
Any student or current borrower with federally held undergraduate, graduate, and Parent PLUS loans issued before June 30, 2022, is eligible for the PLSF program.
There are, however, some program limitations. Individual borrowers earning more than $125,000 annually and households earning more than $250,000 annually do not qualify for the program.
What Are The Tax Implications of Student Loan Forgiveness?
Generally speaking, borrowers must pay taxes on the canceled balance of any debt forgiven, waived, or reduced debt, as this discounting is typically considered income.
In these circumstances, the lender would send the borrower a tax document called a Form 1099-C that shows the exact amount of the loan reduction, which the borrower is then required to declare as “taxable income.”
Student loans forgiven under the PLSF program, however, are not subject to federal income tax. Under the American Rescue Act, passed through congress last year, federally held student loan forgiveness is tax-exempt until 2025.
All of this said, individual states still have the option to tax student loans forgiven under the PLSF program. Roughly half a dozen states are still contemplating the issue, with most leaning toward counting this new forgiveness program as taxable income.
Fortunately, California is among the 37 states that have formally announced they WILL NOT TAX student loans forgiven under Biden’s new program.
If You Don’t Qualify For The PLSF Program, You May Qualify For Other Tax Deductions
If you’ve got student loan debt but earn more than $125,000 annually, or your household earns more than $250,000 annually, you could still qualify for other tax exemptions.
If you have questions about exempting student loan debt on your taxes, get in touch for a FREE consultation!