Are You Going To Owe Taxes On Forgiven Student Loan Debt?

First of all, let’s recap some of the things that are happening now as the long-term coronavirus pause on student loan debt begins to expire for millions of Americans who invested in higher education in the past few years (or even up to a couple of decades ago).

First, as those loans start to become active again, many borrowers don’t know who their loan services are, because their debt was sold (or subject to changed management) during the pandemic era.

There’s not much of a robust plan to inform borrowers about who’s handling their loans, either.

Then you have the usual negligence and bad faith efforts of lenders who all too often obscure information, withhold important data, or abuse their power in lending transactions.

But there’s another problem that borrowers will have to face as they go through their tax returns next year…

It turns out that although the federal government tried to make debt forgiveness non-taxable in this case, every state has its own rules, and with 50 states in the union, that gets pretty complicated.

Reporting on Taxation Requirements

One of the first places a lot of people start is with major online news sources like Fox Business online where Evelyn Pimplaskar writes:

“The American Recovery Act excludes from gross income any amount of federal student loans forgiven for any reason between Dec. 31, 2020, and Dec. 31, 2025. That includes:

Amounts forgiven under the Public Service Loan Forgiveness Program

Teacher or healthcare loan forgiveness programs

Income-driven repayment plans (after making 20 years of on-time payments)

The act also applies to the broad-scale forgiveness announced by the Biden administration. So if your 2022 gross income is $75,000, and you received $10,000 in forgiveness, when you file your federal taxes next year, you’ll only need to report (and pay taxes on) $75,000 of gross income — not $85,000.”

But like many other stories on this in mainstream news, Pimplaskar points readers towards the Tax Foundation, an authority on these sorts of financial details.

So what does the Tax Foundation say about the American Rescue Plan Act and how it affects this aspect of student lending?

“Under … the American Rescue Plan Act … the forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income,” writes Jared Walczak. “States which follow the federal treatment here will likewise exclude debt forgiveness from their own state income tax bases. But, for a variety of reasons, not every state does that.”

Read this list of six interactions that Walczak provides:

“Conform to the current version of the IRC with ARPA (exempt)

Conform to the current version of the IRC but decouple from ARPA (taxable)

Not fully conform to the current IRC but bring in the relevant ARPA provision (exempt)

Not fully conform to the current IRC but separately exclude student debt cancellation (exempt)

Conform to a pre-ARPA version of the IRC (taxable)

Selectively conform to the IRC or adopt independent definition of income (taxable)”

Clear as mud?

The jargon and jumbled execution of this set of differences is maddening. Decouple? Not fully conform?

If that’s not confusing enough, many states are enacting changes now, as legislatures look at whether or not they should leave debt forgiveness amounts in the ‘taxable’ column.

We reached out to the CFPB to get clarity on this issue, but they declined to comment. Maybe there’s some down side to the established agency giving responses to independent press. In any case, the CFPB is still a top resource for borrowers, and when the chips are down, being able to network for advocacy is crucial.

Student Loans and Taxes?

We don’t think that student loan borrowers should be subject to paying taxes on forgiven debt amounts. It sort of defeats the whole purpose of providing these financial relief efforts in the first place!

Also, it’s not as if there’s money going into the borrower’s pocket. They get relief from debt, but that doesn’t give them cash to withhold taxes from – so where does that money come from? It comes from their income and revenue streams – much like the original payoff money.

Know your rights as a borrower, and how to take on shady lenders. Understand the resources available to you in terms of federal state and local programs. Ans stay with us as we document the troubles borrowers face – journeying with them, and helping to understand how to combat lender abuse and fraud.