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.
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.
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)
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.
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.
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.
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
- 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.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.