It was bound to happen. The ITT Technical Institute and more recently  Corinthian Colleges had been taking advantage of the federal government with their student loans. As a result, many of the students’ loans were forgiven and many students were released from their debts. Although these institutes are rare cases, we still ask– Student Loan Forgiveness. Is it taxable?

The Education Department has mentioned that over $15 billion in student loans for nearly 700,000 borrowers have been canceled. 

In general, loan cancellation or reduction still means the person pays taxes for it. Imagine you still have the college loan, you earned quite a bit to pay the money back, you will list this repayment money under income because you earned the money used to pay for it. If you have a big college loan, your tax would also be as hefty. The tax would depend on how you got the loan forgiveness in the first place:

  1. Public Service Loan Forgiveness, Non-taxable

When your loans are forgiven through PSLF, it’s because you have been working in a non-profit or public career. 

  1. Total and Permanent Disability (TPD) Discharge Program, Non-taxable

If you are unable to find long-term employment due to a medical condition or disability, you can make use of this loan forgiveness.

  1. Borrower Defense to Repayment — Non-Taxable

Student loan forgiveness for schools that took advantage of the federal government. These are non-taxable.

  1. Income-driven repayment plan. Taxable

Income-driven repayment (IDR) is a collection of federal student loan repayment plans. IDR plans allow borrowers monthly payments using a formula based on their income. It’s a very complicated program with a lot of restrictions and demands as there are several subprograms under the IDR. Once the loan has reached 20 (some 25) years, whatever is left of the loan goes through loan forgiveness. This is still taxable, as of today.

One thing to mention is that the Biden Administration has been pushing to make student loan forgiveness for everyone tax-free, because of recent court rulings about a few colleges defrauding the government. There are also provisions under the March 2021 COVID-19 relief package concerning the taxes for student loan forgiveness, to put it in less complicated terms, the provision frees the student from taxation for their loan forgiveness until 2025. We are all hoping that everyone in the federal government make the right decision and push it through.

Knowing the when, which, what, and the why about your personal taxes can be a little daunting, and no one wants an audit! So, Peter Witts CPA PC is your perfect choice as we also handle personal taxes, and prepare everything for you. Contact Peter Witts CPA today to get the help you need with your government contract accounting.