IRS won’t tax student loan relief, but some states might

President Joe Biden plans to provide up to $20,000 in college loan debt relief to millions of Americans, causing some to suggest on social media that recipients might get an unexpected tax bill from the IRS next April. 

The feds won’t be coming for a share of the cash. But it’s possible some states will, one analysis said.

"All those college kids that got their student loans forgiven better look at this," read a Facebook post on Aug. 25. "The forgiven amount is still taxable and must be reported to the IRS as income. If they think the interest rates are bad with their school loans, wait until they see the IRS interest rates."

The post was flagged as part of Facebook’s efforts to combat false news and misinformation on its News Feed. (Read more about our partnership with Facebook.)

The post shows a screenshot of an IRS webpage about canceled debt, with this sentence on the image circled in red: "In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs."

Biden announced on Aug. 24 a plan to forgive $10,000 in federal student loan debt for individuals making less than $125,000 or couples making less than $250,000. The canceled amount doubles to $20,000 for recipients of Pell Grants who qualify, with the same income restrictions.

Normally, the info from the IRS webpage would apply, and taxpayers who receive debt relief must report the amount of the forgiven loan as taxable income to the IRS. However, a White House fact sheet states that the debt relief won’t be considered as taxable income at the federal level.

"Thanks to the American Rescue Plan, this debt relief will not be treated as taxable income for the federal income tax purposes," according to the fact sheet.

In section 9675 of that law, it states that the Internal Revenue Code of 1986 is amended to add a "special rule for discharges in 2021 through 2025," and states that discharges of "any loan provided for postsecondary educational expenses" will not be counted as gross income.

Because debt forgiveness has typically been considered taxable income, a lender forgiving a debt would usually send a 1099-C form both to the IRS and the taxpayer. It's not clear whether that will still happen in this scenario, experts we contacted said. 

Not everyone is completely off the hook when it comes to taxes, though. Certain states may consider the loan forgiveness as taxable income.

According to an analysis from the Tax Foundation, a nonpartisan Washington, D.C.-based think tank, six states —  Arkansas, Massachusetts, Minnesota, Mississippi, North Carolina and Wisconsin — could tax the money based on their current laws.

That number could shrink if those states choose to make legislative changes before the spring to conform with federal tax law, or if the states determine administratively to not count the debt forgiveness as taxable income, the analysis said.

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The analysis was first published Aug. 25 and initially said up to 13 states could tax the loan forgiveness amount. But an Aug. 30 update, reflected statements issued by state officials and noted that the initial post relied on slightly out-of-date data. 

Efforts are already underway in at least two of those states to make changes so that the loan forgiveness is not taxable. 

In Wisconsin, the state’s Department of Revenue told Milwaukee TV station WTMJ it will ask the Republican-led Legislature to change its tax law to align with the IRS.

Minnesota’s Department of Revenue said on its website that the loan forgiveness would be taxable under current law, but the chair of the Senate Taxes Committee told Minneapolis TV station KARE-11 she would seek a special session to address the issue.

A Facebook post warned that student debt relief is taxable by the Internal Revenue Service.

A provision in the 2021 American Rescue Plan excludes student loan relief from being taxed at the federal level through 2025.

Six states could count the discharged loan amount as taxable income if they don’t make changes to their laws before next spring. We rate this False.