The answer depends on which program you enroll in. In some cases, the IRS views the forgiven loan amount as taxable income. In others, the forgiven loan amount is viewed as non-taxable income.
Tax-Exempt Student Loan Forgiveness Programs
Public Service Loan Forgiveness (PSLF)
The IRS does not view the amount forgiven through public service loan forgiveness as income, so it is not taxed even if it’s $100,000+. You earned the forgiveness through your public service, so you’re free from tax liability.
Overview
Public Service Loan Forgiveness forgives 100% of your eligible loan balance after you make 120 qualifying payments. To qualify, you must work full-time hours for a government agency, 501(c)(3) not-for-profit organization, or a non-tax-exempt non-profit that’s primary purpose is providing qualifying public services. Plus, your job title doesn’t matter. Typists, managers, public school teachers, non-profit founders, janitors, etc. all qualify for 100% forgiveness of eligible loans so long as they work full-time for an eligible employer.
Qualifying loans include any non-defaulted loan received under the William D. Ford Federal Direct Loan Program or other federal loans consolidated into a Direct Consolidation Loan. You must also enroll the loan in a qualifying repayment plan. This includes income-drive repayment plans, which calculate your monthly payment based on your income. Depending on your income, you could end up owing as little as $0 per month.
Teacher Loan Forgiveness (TLF)
You never have to pay taxes on loans forgiven through Teacher Loan Forgiveness. You earned the forgiveness through your teaching service, so you’re free from tax liability.
Overview
The program forgives up to $17,500 of your Direct Loans or Federal Stafford Loans. How much you receive depends on the subject you teach. Special education teachers and high school math and science teachers can earn the most under TLF.
Eligible teachers are those who work for five complete consecutive years as a full-time, highly qualified teacher at an elementary school, secondary school, or educational service agency that serves low-income students. Also, the loan that you want forgiven must have been disbursed before the end of your five years of teaching service.
Teachers who work for a public school system or an eligible 501(c)(3) not-for-profit can also apply for Public Service Student Loan forgiveness. However, payments made during your five-year-period do not count toward the 120 payments required for PSLF.
Total & Permanent Disability Discharge (TPD)
Does Death & Disability Discharge have a student loan forgiveness tax?
It depends on when you received a TPD discharge.
- Loans discharged through TPD before January 1, 2018 may be viewed as taxable income by the IRS.
- Loans discharged through TPD from January 1, 2018 to December 31, 2025 are not considered income by the IRS.
Overview
Borrowers who can prove that they are totally and permanently disabled might be eligible to have their total student loan balance forgiven. You must verify your disability with documentation from a physician, the Social Security Administration (SSA), or the Veteran’s Administration (VA). In general, you must have a condition that has lasted for a continuous 60 months, is expected to result in death, or is expected to last for a continuous 60 months.
Closed School Discharge
Any amount forgiven as a result of the Closed School Discharge program is not viewed as taxable by the IRS.
Overview
If you’re unable to finish your degree because your school closed, you’re likely eligible for Closed School Discharge on all your FFEL, Direct Stafford, PLUS, and Perkins loans. The program discharges 100 percent of all eligible federal loans, meaning you do not have to repay the debt.
To qualify, you must meet the following criteria:
- You were enrolled when the school closed;
- You withdrew within 120 days of the school closing; or
- You were on an approved leave of absence when the school closed;
You are not eligible if:
- You withdrew more than 120 days before the school closed
- You completed the same or a comparable program through teach-out at another college
- You completed the same or comparable program by another means
- You completed all coursework for the program at the closed school (even if you didn’t yet receive a diploma or certificate)
Perkins Loan Cancellation
The IRS doesn’t consider funds canceled through Perkins Loan Cancellation as taxable. You do not have to pay taxes on the amount forgiven.
Overview
Schools no longer award Perkins Loan, but the Perkins Loan Cancellation program still helps borrowers who previously borrowed a Perkins Loan.
Anyone with a Perkins Loan may be eligible for cancellation of up to 100% of a Federal Perkins Loan if they work full-time as or for:
- Special Education teacher or therapist
- Teacher at a low-income school
- Math, science, foreign language, or bilingual education teacher
- Early childhood education provider
- Employee at a child or family services agency
- Faculty member at a tribal college or university
- Firefighter
- Law enforcement officer
- Librarian with master’s degree at Title I school
- Military service
- Nurse or medical technician
- Professional provider of early intervention (disability) services
- Public defender
- Speech pathologist with master’s degree at Title I school
- Volunteer service (AmeriCorps VISTA or Peace Corps)
Unlike other loan forgiveness programs, the Perkins Loan Cancellation program doesn’t forgive your entire loan balance at once. Instead, a percentage of your loan balance (including interest) is cancelled for each year of service. For teachers, it works like this:
- 1st & 2nd year: 15% canceled per year
- 3rd & 4th year: 20% canceled per year
- 5th year: 30% canceled per year
Taxable Student Loan Forgiveness Programs
In the case of the following student loan forgiveness programs, the IRS views that forgiveness as taxable income. You’ll need to factor the amount into your taxes for the tax year it’s awarded. For some borrowers, it’s a significant tax bill. That’s not to say you shouldn’t pursue the loan forgiveness. It’s just a future cost you need to prepare for.
End of Loan Term Forgiveness
The IRS views loan amounts forgiven at the end of an income-driven repayment plan as taxable. You’ll have to claim the amount as income on your taxes, which could leave you with a hefty tax bill.
End of Loan Term Forgiveness Overview
All federal income-driven repayment plans offer student loan forgiveness after the end of the loan term:
- Income-Based Repayment (IBR): 20 years until forgiveness
- Income-Contingent Repayment (ICR): Up to 25 years until forgiveness
- Pay As You Earn (PAYE): 20 years until forgiveness
- Revised Pay As You Earn (REPAYE): Up to 25 years until forgiveness
After making payments for 20 to 25 years (the loan term), your remaining student loan balance becomes eligible for forgiveness. The programs double or more than double the standard 10-year loan term, so it takes much longer until you’re debt free.
What About State and Local Taxes?
The student loan forgiveness tax implications outlined above apply to federal taxes. Although unusual, it’s possible for states and local governments to handle forgiveness programs differently. For example, some states consider loans discharged for total and permanent disability as taxable income. Check with your state or local government for more information.
