Is Forgiven Student Debt Taxable?
During his campaign for president, Joe Biden offered his proposal for “an immediate cancellation of a minimum of $10,000 of student debt per person.” Two years into his presidency, he’s delivering.
On Wednesday, the White House announced a “three-part plan” to address student loan debt, which includes:
- Up to $10,000 in federal student debt cancellation, with an additional $10,000 in cancellation available to people who were low-income students receiving Pell Grants.
- Proposals to cap monthly payments for undergraduate loans at 5% of discretionary income, and to retroactively expand eligibility for public service loan forgiveness.
- Pushing for policies that combat the rising cost of higher education, including larger Pell Grants, free community college and increased pressure on schools to manage price hikes.
In addition, the White House announced one last extension of the student loan repayment pause that was first put in place at the start of the COVID-19 pandemic in early 2020. The final extension runs through Dec. 31, 2022.
The debt relief is available for individuals with incomes below $125,000 (or household incomes under $250,000), which is estimated to be up to 43 million borrowers.
Many people may wonder if this is too good to be true — if taxes might take a big bite out of forgiven amounts. It won’t, according to the White House:
“Thanks to the American Rescue Plan, this debt relief will not be treated as taxable income for the federal income tax purposes.”
Forgiven debts generally are considered taxable income by the IRS. But as we wrote in “6 Ways the New COVID-19 Relief Law Affects Retirees,” the American Rescue Plan Act, a federal law passed in 2021, shields forgiven federal student loans through 2025 from federal taxes.
The timing for this forgiveness remains unclear. The White House announcement merely says “more information on claiming relief will be available to borrowers in the coming weeks.” Potential legal challenges could also delay relief.
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