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Student Loan Forgiveness and Refunds: What Gets Taxed

After the initial excitement of student loan forgiveness or a refund, borrowers often worry about tax consequences.

Written By: Michael P. Lux, Esq.

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Over the past year, many borrowers have seen loan balances disappear due to forgiveness. In some cases, borrowers even received large refunds.

In the coming months, millions more will benefit from student loan forgiveness programs.

Among all of the good news, there is a growing concern about tax bills. Does student loan forgiveness get taxed? Are refunds from lenders taxable?

Spoiler Alert: In most cases, both the forgiveness and the refunds are tax-free.

Student Loan Refunds: Highly Unlikely to Get Taxed

To understand this concept, let’s be crystal clear about what it means to get a refund: A refund is an overpayment of a bill or debt.

For example, suppose you accidentally paid your credit card company $500 when your bill was only $50. When you get that $450 put back in your checking account, there isn’t any tax liability. A refund on an overpayment of a student loan is the same thing.

Sherpa Clarification: The title of this section says that refunds are “highly unlikely to get taxed” instead of plainly saying they don’t get taxed. My phrasing here is partly a lawyer thing: by qualifying my language, I won’t be wrong if someone gets taxed on a refund.

However, the primary reason for using terms like probably and usually is that there isn’t a uniform set of tax laws. There are federal taxes, state taxes, and local taxes. Within each jurisdiction, there can be some crazy rules.

Where I can, I’ll point out where some states might behave differently than the majority. However, analyzing every state and locality isn’t practical or useful.

PSLF Forgiveness: Not Taxed at Federal Level, States Vary

First, the good news on Public Service Loan Forgiveness: by statute, the federal government does not tax PSLF forgiveness.

States are a different story.

However, the news on this front is still mostly good. Some states don’t have an income tax. In these states, there isn’t a tax bill from PSLF. Likewise, many states follow the federal government in defining income. In these states, PSLF isn’t taxed.

Sadly, in a handful of states, taxes may become an issue.

An interesting component in this analysis is that state laws are rapidly changing. Some states are passing emergency legislation to remove a tax liability on loan forgiveness, while others are passing legislation to tax forgiveness. The best way to find out up-to-date tax rules in your state is to simply Google “PSLF Tax [your state].”

Biden Forgiveness: Not Taxed at Federal Level, Some States Tax

The Biden adminstration previously tried to cancel $10,000 per student loan borrower, the will be adjusting IDR payment counts to forgive debt for many more borrowers, and they are attempting another round of forgiveness for some borrowers.

These forms of forgiveness are all different, but they all are called Biden forgiveness by some borrowers and the tax rules for each type are identical.

Through 2025, there isn’t a federal tax on student loan forgiveness. However, as things stand now, the tax bomb is set to return in 2026. This will require some planning for borrowers on IDR plans, but those who get forgiveness before 2026 won’t have to worry.

At the state level, it’s possible that a state that doesn’t tax PSLF might still tax the one-time forgiveness. As things stand right now, that is the rule in Indiana, and it appears unlikely to change.

If you live in North Carolina, Indiana, Mississippi, Arkansas, or Wisconsin, you may have to pay a tax on one-time forgiveness. However, your state may change its rules moving forward.

What about payments made for others or by others?

Another tax concern for student loan borrowers comes in the form of student loan repayment help.

Suppose a family member is generous enough to pay off some or all of your student debt. Does that help get taxed?

The good news for borrowers is that this help falls into the category of gift taxes. For the recipient of the gift, there isn’t a tax bill. However, the gift-giver may have to pay a gift tax.

In the case of student loans and gift taxes, there are several exceptions that can help most people completely avoid a tax bill.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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