What Biden's student loan forgiveness means for your taxes

Editor's Note: This post was updated to reflect President Biden enacting federal student loan forgiveness on Aug. 24, 2022.

Since President Joe Biden's first day in office, federal student loan borrowers have been eager to see if and when he will follow through on his campaign promise to cancel $10,000 of loans per borrower as part of his Emergency Action Plan amid the ongoing pandemic. On Aug. 24, 2022, he enacted federal student loan forgiveness for up to $20,000 per borrower.

So how does this affect your taxes come next year?

Below, we break down the latest on President Biden's sweeping student loan forgiveness, plus more on the implications of student loan forgiveness on borrowers' taxes.

On Aug. 24, 2022, President Biden announced widespread federal student loan forgiveness for millions of borrowers. Eligible borrowers fall below the income levels of $125,000 for individuals and $250,000 for families and can receive the following:

• Up to $20,000 of student debt cancellation for Pell grant recipients
• Up to $10,000 of student debt cancellation for most other non-Pell borrowers

This also includes extended forbearance (i.e. the repayment freeze) until the end of 2022, so those who still have federal student loan payments after accounting for the forgiveness will not have to make payments until the beginning of 2023.

This move also includes a revamp of the income-driven repayment plan system for undergraduate loans. Monthly payments are being reduced from 10% of monthly income to 5%, along with other tweaks that will lower payments for those on income-driven repayment plans.

However, forgiveness and forbearance doesn't affect any private student loans that are outstanding. If you do have a private student loans, consider refinancing with a lender like SoFi® Private Student Loan Refinancing or KeyBank to get a lower interest rate and better payment terms.

In March 2021, Biden signed the American Rescue Plan into law, which included a provision that all student loan forgiveness is tax-free.

While there may not be any applicable federal income taxes to student debt wiped away from forgiveness, there is still the potential to owe income tax to your state based on your forgiven balance. If that is the case, you may consider putting some money away for tax season.

But in other cases, forgiven debt is typically taxable.

"Generally, when a debt is forgiven, student loans or otherwise, the amount forgiven represents taxable income in the year it is written off," Steven Rossman, CPA and shareholder at Drucker & Scaccetti, a Philadelphia-based accounting firm focusing on taxation, tells Select.

As an example, Rossman shows how federal student loan forgiveness of $10,000 would have traditionally been taxed prior to Biden's tax update.

Say as a federal student loan borrower, you have $10,000 of your loans canceled in 2022. This means that $10,000 would be added to your taxable income, under what's called "Cancellation of Debt (COD)" income, and you would presumably receive a Form 1099-C for 2021 as documentation.

Then, when you go to file your 2022 tax return (in April of 2023), you will have $10,000 to report as COD income. If you are, for example, in the 20% federal tax bracket, this will result in an additional tax of $2,000 ($10,000 x 20%), which will be due in April of 2023 when 2022 taxes are filed. (Tax rates will vary by individual.)

"The good news is that the borrower doesn't have to pay back $10,000, but the bad news is that they would owe $2,000 for taxes," Rossman says.

Before Biden signed the American Rescue Plan into law, there were only certain exceptions that apply as to whether or not student loan forgiveness can be taxed. Finaid.org says that the forgiveness may be excluded from taxable income if it is contingent upon the borrower working for a specific period of time in a certain profession, such as with Public Service Loan Forgiveness (PSLF). Additional exceptions to taxable canceled debt can be found on the IRS website.

Rossman had speculated prior to Biden's tax update that the unprecedented circumstance of the pandemic may have meant that student loan borrowers would see additional exceptions set in place.

"As we've seen from loan forgiveness in the Paycheck Protection Program (PPP), the loans forgiven under the PPP are not taxable to business owners, if the loans are used for eligible business expenses," he says. "Perhaps this will set precedent for the taxability of student loans that are forgiven."

Student loan forgiveness in 2022 will not increase your federal taxable income, thanks to the latest American Rescue Plan that makes all student loan forgiveness tax-free. You may be on the hook for state tax, however.

Now that student loan forgiveness is underway, it's best to readjust your budget and allocate more towards your emergency fund, pay down other forms of debt and invest for the future.

Catch up on Select's in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.

Fixed rates range from 4.49% APR to 10.99% APR with 0.25% autopay discount and 0.125% SoFi Plus discount. Variable rates range from 5.74% APR to 10.99% APR with 0.25% autopay discount and 0.125% SoFi Plus discount. Unless required to be lower to comply with applicable law, Variable Interest rates will never exceed 13.95% (the maximum rate for these loans). SoFi rate ranges are current as of 9/23/26 and are subject to change at any time. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. You may pay more interest over the life of the loan if you refinance with an extended term.