Borrowers Defense/Student Loans

[Dailey]

Good Afternoon, 

 As of Aug 2023, I was approved for Borrower's Defense Against Repayment for my student loans. The total debt including interest that was written off was $45,000, without interest 28,334.00.  I live in Tennessee. I have not received the Cancellation of Debt form yet, but I do have all the letters from Nelnet, StudentAid.gov and US Dept of Education showing my approval. All of the student loan debt has been removed from my credit history, as well. Will this affect my return next year? Will I need to include this in my income? Will I be required to pay taxes on it? Is it easier to pay for someone to sit down and go over and complete my taxes for me OR is it an easy process using TurboTax? I am due for a small refund of $1,109, will that affect anything? Thank you for your assistance with my questions. This event is greatly appreciated! 

[MelanieC1]

Hi @Dailey 

Glad to hear that you were approved for the Borrower Defense To Repayment for your student loans.  Federal loans that are discharged based on the Closed School or Defense to Repayment discharge process loan forgiveness under Borrower Defense to Repayment is not treated as taxable under federal law.

And because you live in Tennessee, you do not prepare a state income tax return.

If you receive any additional information from the lenders or tax notices TurboTax will help walk you through these questions.  Remember we also offer Live Help and our Full Service tax assistance as well that you can use as you prepare your tax return for 2023.

Thank you!

Melanie

[Cdmarshall6411]

What about this same situation in other states, such as MN?

[marctu]

The IRS has stated that loans discharged through the Borrower Defense to Repayment program are not taxable income. This is because the program eliminates federal student loans for borrowers who were misled by their college or whose school violated state laws or engaged in misconduct.  See: Income from discharge of indebtedness 

One should be aware that  currently as written here: Borrower Defense Updates there is an injunction in place for the regulations that are above.

Prior to the injunction only five states were on track to tax forgiven student loans: Arkansas, Indiana, North Carolina, Mississippi, and Wisconsin. 

Just for visibility, since your follow up question was about  Minnesota, you can look here as well:  Cancellation of Education Loans Minnesota Department of Revenue 

Minnesota specifically states:  If your discharged education loans were not taxable federally, they are not taxable on your Minnesota return.

I hope this was helpful and thank you for the follow up question @Cdmarshall6411

All the best,

Marc T.

TurboTax Live Tax Expert

[Arcwelder]

@marctu  Does this injuntion mean that the 5 taxing states now cannot tax BDTR discharge? I'm in NC and they have stated they did not adopt federal guidelines for taxation of forgiveness. 

[RobertB4444]

No, the injunction does not effect state regulations or treatment of student debt forgiveness.  North Carolina is still taxing BDTR discharge as detailed here.  The federal court case will not effect that.

@Arcwelder 

[jhixster]

I have the same situation and should be receiving my discharge soon. My total refund will be over $10,000. i live in California. I understand that no federal tax will be due, but what about my state tax?

John

[RobertB4444]

No, California is not currently taxing student loan forgiveness.

@jhixster 

[Alsticke]

What if you sent the 1st half of the year living in KY and the 2nd half in IN? And the loans were discharged through BD months before you moved to IN? Do I report the amount on my KY taxes as there was where I was living when they were discharged and the letter I have stating the discharge also states my KY address on it? or on my IN taxes as that is where I end my year? Or both?

[RobertB4444]

If you received the forgiveness in Kentucky then it's subject to Kentucky taxes and filed on the Kentucky tax return.

@Alsticke 

[Debwi]

I am in a similar situation with borrowers defense student loan discharge of more than $50,000. My loans were just discharged in Feb 2025. Will I have to pay Wisconsin State Tax?

[DawnC]

According to the Wisconsin Dept of Revenue, that income would be taxable in Wisconsin.   The following forgiveness programs will not be taxable in WI:

• Public service loan forgiveness program (PSLF)
• Forgiven under the teacher loan forgiveness program
• National Health Service Corps Loan Repayment program

@Debwi