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What is the New Federal Student Loan Forgiveness Plan?
As of August 24, 2022, the Biden Administration announced a three-part plan to cancel certain amounts of federal student loan debt. The Student Loan Forgiveness Program aims to address the inflated costs of college tuition and make it easier to pay off existing students loans.
Part 1 will extend the student loan repayment pause until December 31, part 2 will provide targeted debt relief cancellations to middle and low-income families, and part 3 aims to make navigating the current student loan system more manageable.
Who is Eligible for Relief and What is Covered?
Look to the IRS and your tax filings to determine your eligibility for Biden’s student loan relief. All federal student loans that were taken out before June 30, 2022, qualify for debt cancellation – meaning you will not owe up to $10,000 of existing federal loans, and $20,000 if you received Pell Grants.
This is great news, I think. Let’s sift through the noise to determine if you are eligible, how much, how to apply, and what happens if my loan is forgiven?
Frequently Asked Questions
Answers
What forms of student loans are included in Biden's forgiveness plan?
Federal student loans and Pell Grants
How much student debt is covered?
$10,000 or $20,000 for Pell Grant recipients
Do I qualify?
Yes, if your AGI is below $125,000 ($250,000, if Married Filing Jointly)
How to apply?
Complete the application in October with form 1040 for the 2020 or 2021 tax years
How much will my student loan forgiveness tax be?
$0.00 taxable to the IRS, but States may vary
How to Apply for the Student Loan Forgiveness Program?
Look at your personal federal income tax return, Form 1040, to determine your eligibility. Biden’s plan allows federal student loan borrowers to use their adjusted gross income (AGI) for tax years 2020 or 2021. If you have not filed income taxes for either or both tax years, NOW is the time to seek assistance. Since your AGI is the one factor that makes or breaks your chance at being $10,000 or $20,000 dollars richer (or debt free), seriously consider a professional tax preparer. It has never been more important to reap every tax benefit that is available because your income threshold cannot exceed $125,000 ($250,000 for married couples). The limit is not based on taxable income, which is usually much lower than your AGI due to below-the-line deductions and other tax credits.
File tax returns for 2020 and 2021, even if you had no filing requirement, because the Department of Education will use the returns to process your relief. A tax practitioner will make certain your AGI is correct and electronically file (e-file) the returns for immediate IRS receipt.
The application to apply for forgiveness will be available in early October. If you wish to be notified when the application is open, visit the US Department of Education's mailing list page. It will take roughly 4-6 weeks for the federal government to process your student loan forgiveness application, so have your federal income taxes ready or you may end up with a payment come January. The administration confirmed the student loan payment pause ends December 31st, so borrowers will need to arrange for monthly payments on any existing loans come January.
What are the Tax Implications of Student Loan Debt Forgiveness?
Debt cancellation (such as forgiveness for those enrolled in an income-driven repayment plan) are generally treated as a taxable event, meaning the amount forgiven is treated as income that will be taxed. However, the IRS has confirmed student loans that are canceled through Biden’s plan will not be taxable, i.e., you will not add this to your income for federal tax purposes. Several states will charge income tax on the cancellation of debt, unless there is legislative action. These states currently are Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
Many government benefits rely on your federal tax filings and standing with the IRS. Think all three stimulus payments, advanced child tax credits, and now student loans. Do not miss out on benefits you are entitled to because your IRS account and federal tax filings are too important to put on the back burner – tax professionals are ready to help. Contact the experts at Community Tax to see if you qualify for tax savings.
References
US Department of Education’s mailing list page
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Frequently Asked Questions
How much federal student loan debt can be forgiven under Biden's forgiveness plan?
Eligible borrowers can have up to $10,000 in federal student loan debt canceled under the plan. If you received Pell Grants, that amount doubles to $20,000 in potential debt relief. Only federal student loans taken out before June 30, 2022, qualify for cancellation.
What income limit must be met to qualify for student loan forgiveness?
Your adjusted gross income (AGI) must not exceed $125,000 for individual filers or $250,000 for married couples filing jointly. Importantly, eligibility is based on AGI — not taxable income — which means below-the-line deductions and tax credits do not reduce the income figure used to determine your qualification. Borrowers can use their AGI from either tax year 2020 or 2021, whichever is more favorable.
Will forgiven student loan debt be counted as taxable income on a federal tax return?
The IRS has confirmed that student loans canceled through Biden's forgiveness plan will not be treated as taxable income at the federal level, meaning you will owe $0.00 in federal tax on the forgiven amount. However, several states — including Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin — may still tax the canceled debt as income unless their legislatures take action to exempt it.
What tax form is used to determine eligibility, and what if a return hasn't been filed?
Eligibility is determined using your Form 1040 federal income tax return for either tax year 2020 or 2021. Even if you had no filing requirement for those years, the Department of Education will use those returns to process your relief, so filing is strongly recommended. Working with a professional tax preparer ensures your AGI is accurately reported and your return is electronically filed for immediate IRS receipt.
When can borrowers apply for student loan forgiveness, and how long does processing take?
The application for student loan forgiveness was set to become available in early October, and borrowers can sign up for the U.S. Department of Education's mailing list to be notified when it opens. Once submitted, the federal government takes approximately 4–6 weeks to process an application. Borrowers should act quickly, as the student loan repayment pause ends December 31st, meaning monthly payments on any remaining loan balances will resume in January.
About the Author
Tax Professional
Jessie Seaman is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.