If you’re one of the 45 million Americans with student loan debt, you’re probably aware of President Biden’s proposed plan for student loan forgiveness. On August 24, the Biden administration announced their Student Debt Relief Plan, which would offer forgiveness of up to $10,000 for most Americans, and up to $20,000 for Pell Grant recipients.
While there’s still much we don’t know about the plan, Padgett President Roger Harris has some answers to common questions:
Will I really be getting $10,000?
“Don’t go and spend it yet,” Roger warns. Though the President has promised this loan forgiveness, there are some court challenges to the plan. Some have questioned his authority to initiate the plan without Congressional approval, meaning a court could potentially throw out the entire plan. Unfortunately, we don’t know for sure what will happen yet.
If the plan passes, you may be eligible for student loan debt relief if your annual income in 2020 or 2021 was less than $125,000 (individual or married, filing separately) or $250,000 (filing jointly). Most federal student loans are eligible for forgiveness, but be sure to check the StudentAid.gov website to learn more.
How do I get the loan forgiveness?
The application is not yet live, but we expect to see it online sometime this month, October 2022. When the application is available, you’ll be able to find it online at StudentAid.gov, and you can sign up for email alerts for when the form goes live. You’ll have until December 31, 2023 to apply, but it’s recommended to apply as soon as possible, before the payment pause ends.
It’s free to apply for the loan forgiveness, so be wary of scammers. “Anytime money is involved, scammers will pop up,” Roger says. “Don’t pay anyone to get rid of your debt for you.”
The U.S. Department of Education also warns users not to reveal their FSA ID or account information to anyone, not to give personal information to unfamiliar callers, and not to refinance your loans without knowledge of the risk to your debt forgiveness eligibility.
Will this be taxable?
The forgiveness of debt is usually a taxable event, however the federal government has already stated that this student loan forgiveness is an exception. You will not need to pay federal income tax on the forgiven amount.
State taxes are another story. “It’s up to the states to decide whether or not they will tax that income,” Roger says. “Right now, there are several states that, unless they change their rules, will tax the student loan forgiveness.”
Be sure to check your state’s tax websites and speak to your local Padgett advisor to learn more about the situation in your area.
Do I need to report it on my tax return?
When your student loan debt is forgiven, you may or may not receive an IRS form called a 1099-C for the forgiven amount, and you may wonder if that you need to report that on your taxes. The short answer, Roger says, is “maybe.” If you are in a state that will not be taxing the forgiven debt, and it isn’t taxed federally, you likely won’t need to report it. If your state does tax the loan forgiveness, you will likely need to report that information.
And remember, receiving or not receiving the 1099-C is not an indication of whether or not you need to report. It’s unlikely that the government will send these forms if the forgiveness is nontaxable, but if you receive a form in a non-tax state, don’t report it unnecessarily. And “if you live in a state that will tax the loan forgiveness, not getting a form doesn’t excuse you from not reporting it,” Roger warns. Be sure to talk to your tax professional about your situation, and bring them any IRS forms you may receive.
If you don’t have a tax professional yet, start thinking about it now so you’re ready for tax time. Padgett’s nationwide network of EAs and CPAs are here to help you navigate the tax implications student loan forgiveness and beyond. Find an office near you today!
Meet Roger Harris, Padgett President
Roger Harris is the president of Padgett and has been serving in this role since 1992. He has worked with the company for 50 years, since studying at the J.M. Tull School of Accounting at the University of Georgia. Prior to becoming president of the company, Roger served as President and Chairman of the Board for 10 years in one of the largest Padgett franchises in the system, giving him years of valuable expertise in the franchise industry. He has used his expertise as an industry expert in the Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News and Accounting Today. Roger has also offered testimony before Congress, putting his decades of experience to work as an advocate for small business legislation.