TEXAS, USA — The Biden administration continues to cancel student debt for thousands of borrowers. Viewers turned to the KHOU 11 VERIFY team to get answers on if loan forgiveness could be setting you up for another debt with the IRS.
THE QUESTION:
Is the amount of federal loan forgiveness reported to the IRS as income?
Does the IRS still consider student loans as income and do you still have to pay taxes?
THE SOURCES:
- The White House
- Internal Revenue Service
- U.S. Department of Education,
- Joyce Beebe of Rice University's Baker Institute for Public Policy
- Janet Meade, associate professor of accountancy and taxation at the University of Houston
THE ANSWER:
No, federal loan forgiveness will not be reported to IRS as income, for now.
No, you don't have to pay taxes on student loans.
WHAT WE FOUND:
President Biden continues to move forward with canceling billions of dollars in student loan debt, making the 1099-C IRS form indicating cancellation of debt a somewhat welcome sight around tax time.
The COVID-19 pandemic's three-and-a-half-year-long pause on payments changed the game for borrowers and opened the door for more loans to be forgiven.
According to the U.S. Department of Education, Texans have benefitted the most in the country from the Biden administration rolling out a repayment plan that bases monthly payments on income and family size.
"It really takes into consideration your ability to repay," Beebe said. "So it's not like you won't be able to pay your bills or your rent or your mortgage."
New rules kicked in February 2024 for enrolled borrowers with original loan amounts of $12,000 or less.
Loan forgiveness now comes in as few as 10 years, which is far less than the 20 to 25 years range under other federal IDR plans.
"The general rule is that forgiven debt is taxable," Meade said.
Under the American Rescue Plan, you won't get taxed by the federal government. But this has an expiration date of Dec. 31, 2025.
"The time comes in 2026, when the borrowers are filling their tax returns, just watch out for that 1099-C," Beebe said.
If the Biden Administration is unable to extend the federal changes from the American Rescue Act, you will have to report federal loan forgiveness as income.
You won't have to pay taxes, but that’s only during the period from 2021 to 2025 while the tax changes from the American Rescue Act are in effect.
If you are a Texas resident, there's an extra benefit. You don't have to pay state taxes on the forgiven loan amount, but some states require it.