topic Does the new student debt forgiveness affect our taxes? in Get your taxes done using TurboTax

Does the new student debt forgiveness affect our taxes?

c-laren-sch — Tue, 10 Mar 2026 07:08:16 GMT

Is anyone avoiding filing for this new debt cancellation out of fear for if it will affect how we file taxes?

Re: Does the new student debt forgiveness affect our taxes?

rjs — Tue, 08 Nov 2022 23:38:41 GMT

The federal student loan forgiveness will not affect your federal taxes. Normally a canceled debt is considered taxable income, as if you were paid the money that pays off the debt. But the American Rescue Plan Act specifically excludes the student loan forgiveness from federal tax for loans that are forgiven through 2025.

However, there might be an issue with state income tax. Many states simply follow the federal rules, so they will not tax the federal student loan forgiveness. And of course there are some states that have no state income tax, so there's no issue in those states. But as of now the student loan forgiveness will be taxable in some states. There is some controversy about this. Some lawsuits have already been filed. So it's possible that some states might change their tax laws to exclude the student loan forgiveness.

If you live in a state where the student loan forgiveness is subject to state tax, you could incur a large state tax for the year that the loan is forgiven. For people who are already living paycheck to paycheck, paying the tax could be difficult. They might be tempted to opt out of the loan forgiveness to avoid the big tax bill. But of course the tax is just a small fraction of the remaining amount they will have to pay if they opt out and continue to pay the remaining balance of the loan. It could be a choice of paying, say, an extra $500 of state tax in one year, or paying $10,000 or more over the remaining life of the loan. Opting out would be a short-term avoidance of tax at a very high long-term cost.

Re: Does the new student debt forgiveness affect our taxes?

NCperson — Wed, 09 Nov 2022 01:49:05 GMT

@c-laren-sch - as stated, there is no federal tax on cancelled student debt through 2025. For States, 44 states are not going to tax the cancelled student debt relief either. There are 6 states that are 'in play' to tax any cancelled debt. I live in NC and the state legislature is adament they will not change the law, meaning student debt relief is taxable on the NC tax return (even though there is no federal tax)

this article explains where the 6 states "in play" stand

https://taxfoundation.org/student-loan-debt-cancelation-tax-treatment/

note that as of Nov. 8, there hasn't been any relief, pending lawsuits that has paused the debt cancellation, even though payments begin on Jan 1.