Student loan payment has resumed three months after the Supreme Court ruled against the mass loan forgiveness plan. Borrowers have resumed payment for their loans since September this year. Will taxpayers pay for student loan forgiveness? 

 

Ideally, federal loan forgiveness is treated as taxable income. It is no longer news that the mass loan forgiveness plan was rejected by the Supreme Court. Will borrowers pay tax on other active loan forgiveness programs?

Is Student Loan Forgiveness A Taxable Income?

Student loan forgiveness is generally regarded as taxable income. Under the law, lenders subtract the cost of the forgiven loan from their taxable income while borrowers add it to their annual taxable income. Borrowers treat the forgiven loan as an additional income and pay the tax on the forgiven amount. 

 

Due to the aftereffects of COVID-19, the Biden administration and Congress continue to look for ways to relieve borrowers of their loan burden. According to the new American Rescue Act of 2021, some student loan forgiveness programs are not treated as taxable income. 

 

Lawmakers have recently proposed excluding all student loan forgiveness from taxable income. We are still waiting for its activation. But for now, the following loan forgiveness tax exemptions are actively ongoing until 2025. 

TPD Tax Exemption 

TPD loan forgiveness became tax-free after the Tax Cuts and Jobs Act was passed in 2017. The tax exemption will be active till 2025.

 

TPD loan forgiveness is for American citizens who cannot maintain gainful employment due to permanent medical conditions. Before the Tax Cuts and Jobs Act was passed in 2017, TPD loan forgiveness was treated as taxable income. 

 

IDR Plan Tax Exemption 

The IDR plan forgives borrowers of their loans after paying consistently for 15-20 years. Before the COVID-19 pandemic, student loans forgiven under the IDR plan were treated as taxable income. 

 

The new 2021 American Rescue Plan Act exempted borrowers under the IDR payment plan from paying tax on their forgiven loan. The exception is active until 2025. 

PSLF Tax Exemption 

Borrowers under the Public Service Loan Forgiveness programs are forgiven their loan after 120 consistent payments and working in a public organisation for ten years. PSLF loan forgiveness is usually treated as taxable income, just like the IDR plan.

 

However, ARPA also exempted public sector and non-profit organisation employees under the PSLF program from paying tax on their forgiven loans.