Is student loan forgiveness based on adjusted gross income

Update: The student loan forgiveness application is now available through Dec. 31, 2023. To increase the likelihood your application will be processed before your payment is due in January, experts recommend you submit your application by mid-November.  

This article was originally published on Aug. 25, 2022..

Sweeping student loan debt forgiveness for millions of Americans: That’s the news announced Wednesday by President Biden for his long-anticipated student loan forgiveness plan. With the buzz about this new program, also comes questions. “Who qualifies? How do I apply? Are there other factors I need to know about — like taxes?”

We understand how important this change is for individuals and families alike. The team at H&R Block is here to help answer your questions about how this plan could affect you now and at tax time.

Understanding the Biden-Harris student debt relief plan

What does the three-part plan include?

The relief plan includes:

• debt forgiveness and a final extension of the pause on student loan payments,
• proposed modification of rules for income-driven repayment plans and the Public Service Loan Forgiveness Program (PSLF), and
• helping with future costs, such as increasing the maximum available Pell grant

Student loan debt forgiveness

How much can be forgiven and who qualifies?

Debt cancellation falls into three main groups, providing help for low to middle income families:

• Up to $10,000 to non-Pell Grant recipients if their individual income is less than $125,000 ($250,000 for married couples)
• Up to $20,000 to Pell Grant recipients if their individual income is less than $125,000 ($250,000 for married couples)
• Full forgiveness may be available for those working for non-profits, the military or federal, state, tribal or local government now through October 31, 2022, based on temporary rules for the Public Service Loan Forgiveness Program.

The cancelled debt can be applied toward your accrued interest.

What about current students and parents?

Current students with loans are eligible for this program. Additionally, the student loan debt forgiveness applies to parents who have taken out qualifying loans for their children’s education.

Once my debt is cancelled, is it considered taxable income? Does it impact my refund?

For federal taxes, no. Thanks to rules set in the American Rescue Plan Act any student loan debt forgiven through the Biden-Harris plan will not be treated as taxable income on a federal level. What’s more, the forgiven amount will not impact what you owe or how much you might receive as a federal tax refund.

For state taxes, it depends on where you live. Some states may choose to align with the federal tax rules, while others may consider the cancelled debt taxable income.

In some states, you may need to evaluate whether you qualify for any other type of exclusion such as an insolvency exclusion in addition to reporting the cancellation as taxable income.

Some states do not have an income tax:  Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Help is here! H&R Block can help you anticipate what this means for your unique tax situation and loan forgiveness rules for your state.

I heard there’s an application. Do I have to apply to get my debt forgiven?  

Of the 43 million borrowers who are eligible for relief, nearly eight million will receive it automatically according to the U.S. Department of Education. It boils down to whether the agency has your income information or not. The Dept. of Ed will send you an email and text message (if you’re signed up for alerts) if they determine you qualify for debt relief without applying.

You can now provide this information by submitting a simple application through the department’s website at https://studentaid.gov/debt-relief/application.

How do I find my 2020 or 2021 income?

You can locate your 2020 or 2021 adjusted gross income (AGI) on Form 1040, Line 11.

Final extension of student loan repayments

Is the pause on student loan repayment ending? How long until I need to start making payments?

Due to the pandemic, there’s been a pause on qualifying student loan payments since early 2020.  While the freeze has been extended several times, the Biden-Harris plan allows for a final extension of the student loan repayment pause through Dec. 31, 2022.

Students who have loans left to repay should be ready to resume payments in January 2023. If you benefited from the repayment pause, you should seek this federal assistance before payments resume.

What other impact does the pause on loan payments have?

If you have taken advantage of the pause, you likely know that this affected your ability to claim a student loan interest deduction.  When you resume payments in 2023 you may be eligible for the deduction.

Income-driven repayment

What does income-driven repayment mean?

In order to make student loan repayment more manageable, income-driven repayment plans offer a way to reduce payment amounts for lower- and middle-income borrowers.

How do proposals for the new income-driven repayment plan work?

The plan:

• Allows you to pay no more than 5% of your discretionary income monthly on undergraduate loans.
• Raises the amount of what’s considered non-discretionary income – meaning those amounts are off the table for repayment.
• Forgives your loan balance after 10 years of repayments for borrowers with original loan balances of $12,000 or less.
• Covers your unpaid monthly interest. This means your balance will not grow as long as you make your monthly payments.

Get help with your taxes at H&R Block

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Are student loans included in adjusted gross income?

What is the threshold for student loan forgiveness?

Do you have to make 120 payments for student loan forgiveness?