Do I have to pay taxes on student loan forgiveness?
President Biden’s administration has succeeded in canceling student loan debt more than 5 million borrowersdespite the recent legal obstacles faced by the Saving on Valuable Education repayment plan and the ‘Plan B’ debt relief plan.
The fate of student loan forgiveness remains unclear — especially under a Trump presidency. But if your student debt was wiped out last year, you may be at risk of paying taxes on your forgiven debt.
This story is part of Taxes 2024CNET’s coverage of the best tax software, tax tips, and everything else you need to file your return and track your refund.
Here’s everything you need to know about how student loans can affect your tax return.
Read more: Have you made money this year through PayPal, Venmo or Cash App? The tax authorities will be aware of it
Do I have to pay taxes if my student debt is forgiven?
It depends on where you live.
Education debt relief is typically taxed as income, so each loan amount forgiven is added to your adjusted gross income: if you earn $50,000 and $20,000 in loans is forgiven, your adjusted income that year is $70,000. However, thanks to a provision included in the American Rescue Plan, federal taxes on student loan forgiveness will be forgiven through 2025. So no one will owe federal taxes on forgiven student loans next tax season.
However, you may have to pay state or local taxes on that exemption.
States that student loan debt relief will be taxed
Most states comply with the federal tax system, meaning they follow the IRS’s lead when it comes to tax rules. Because the federal government does not currently tax student loans, these states will not do so either.
But there are thirteen states that are not following federal guidelines. Of those, five states tax student loan forgiveness: Arkansas, Indiana, Mississippi, North Carolina And Wisconsin. Here are the rules and exemptions for each state, and how much you might owe.
Please note that the calculations below do not take into account any tax deductions or credits you may be eligible for.
Arkansas
Arkansas has a graduated state income tax that ranges from 2% to 3.9%depending on how much you earn annually.
If you earned $50,000 in 2024 and had $10,000 forgiven in student loans, your taxable income would total $60,000. This would put you in the 3.9% tax bracket, and would mean you would owe about $390 in state taxes on your student loan debt.
Indiana
Indiana residents are on the hook because they pay both state and local taxes for forgiven debt. There are no exemptions for those enrolled in the Public Service Loan Forgiveness program.
Indiana has a flat state tax rate of 3.05%. Local taxes vary by province.
If you received $10,000 in student loan forgiveness in 2024, you would have to pay $305 in state taxes next year. If you live in Indianapolis (Marion County), you will also pay 2.02% in county income tax, or $202. This would bring your tax total for your forgiven debt to $507.
Mississippi
Mississippi also has one progressive income tax rate. In 2024 you will pay 0% on the first €10,000 you earn, and 4.7% income tax on income above that. So if you earn $50,000 in 2024 and receive $10,000 in student loans, you will be taxed on a total of $60,000. You would actually owe $470 on your forgiven student loan debt.
North Carolina
If you have received student loan forgiveness and live in North Carolina, you will pay a flat income tax rate of 4.5% on your canceled debt for 2024. That means you’ll owe about $450 in taxes on your loan debt.
There are some exceptions to this tax law: Borrowers who are registered with the Public Service Loan Forgiveness Program will not be taxed on forgiven loans in North Carolina.
Wisconsin
Student loans forgiven in 2024 are subject to state taxes in Wisconsin. However, there are some exceptions. If your loans are forgiven under the Public Service Loan Forgiveness Program, the Teacher Loan Forgiveness Program, the National Health Service Corps Loan Repayment Plan, or if you meet the qualifications for total and permanent disability, you are exempt from this tax.
If you receive a different type of student loan forgiveness, you will be charged between the two 4.40% and 7.65% in state income taxes. If you earned $50,000 and received $10,000 in loan forgiveness in 2024, you would be taxed at the 5.3% rate and would owe about $530 in student loan taxes. This may change if you are married and your partner’s income places you in a lower or higher tax bracket.
How to pay taxes on your forgiven student loans
If you get your student loan forgiven, you will receive a Form 1099-C stating the amount forgiven.
“That amount is tax-free on your federal income tax return and in all but the five states,” says Mark Kantrowitz, a student loan expert and member of the CNET Expert Rating Board.
If you live in one of the five states that tax student debt forgiveness as income, you must file that form when you file your taxes, along with documents showing the income you receive from a job, for example.
You can do this yourself by using the IRS Free File Toolbut many taxpayers get help from software like TurboTax (CNET’s Top Pick for Tax Returns in 2024) or a certified public accountant.
What should I do if I cannot pay the taxes on my student debt?
Borrowers who cannot pay the taxes owed may qualify for a repayment plan. This is an agreement with the Tax Authorities that allows you to pay taxes over a longer period of time.
However, keep in mind that there are different types of extensions. An extension of the submit The deadline gives you more time to file your tax papers, but does not extend the payment due date. While a payment plan is a separate agreement do extend the payment term.
Kantrowitz also notes that if you are considered insolvent – meaning your debts exceed your assets – you may be able to have your taxes forgiven.
If my student loans are forgiven in 2025, will I owe federal taxes?
No. According to Kantrowtitz, all student loan cancellations are exempt from federal taxes through the end of 2025. That means if your loans are forgiven in 2025, you won’t owe any federal taxes.
Congress could decide to extend the relief, but as it stands now, student debt relief will be federally taxable starting in tax year 2026.
