Fact check: Student loan forgiveness won’t be taxed by federal government, though states may

Chris Mueller, USA TODAY

September 9, 2022 at 7:54 PM·4 min read

The claim: Student loan forgiveness counts as federal taxable income

In late August, President Joe Biden announced he would cancel at least $10,000 in student loan debt for millions of borrowers, positing that the cost of college had become “too expensive for too many.”

"The burden is so heavy that even if you graduate, you might not have the ticket that graduating college once offered," Biden said.

But posts circulating on Facebook claim there's a notable string attached: That borrowers would still have to pay taxes to the federal government on forgiven student loans.

“All those college kids that got their student loans forgiven better look at this,” reads an Aug. 25 post shared more than 900 times. “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.”

In response to a USA TODAY inquiry, the user who made the post shared a link to a page on the IRS website with general information about canceled debts.

But that information doesn't apply to the forgiven student loans. The American Rescue Plan Act – a $1.9 trillion COVID-19 relief package Biden signed into law in 2021 – exempts student loan forgiveness from taxation at the federal level until the end of 2025. Some states still tax forgiven student loans, however.

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USA TODAY reached out to several users who shared the claim for comment.

Graduates line up before the start of a community college commencement in East Rutherford, N.J., on May 17, 2018.

Feds won’t tax forgiven student debt, but some states might

Many of the posts spreading the claim show a page on the IRS website with information about the tax implications of canceled debt, which typically has to be reported on tax returns.

But a fact sheet released by the White House spells out the federal tax exemption for student loans forgiven under Biden's plan: “Thanks to the American Rescue Plan, this debt relief will not be treated as taxable income for the federal income tax purposes."

In general, canceled debt is taxable unless it's specifically excluded, such as bankruptcy, insolvency and, as in this case, a temporary exclusion made for policy reasons, said Vada Lindsey, a Marquette University law professor who teaches courses in taxation.

“It’s based on the pandemic and everything going on with the economy, so there is a reason why that was enacted,” Lindsey said.

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The claim that canceled student loans will be taxable at the federal level is "absolutely wrong," she said.

There is no legislation, though, that exempts student loan forgiveness from being taxed at the state level. Many states match their tax rules to the federal government, but others will need to decide whether to make changes to their laws.

An analysis by the Tax Foundation lists seven states that appear ready to tax forgiven student loans: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.

If those states ultimately decide to tax forgiven student loans, taxpayers will have to keep that in mind when filing their taxes, Lindsey said.

PolitiFact has also debunked the claim.

Our rating: False

Based on our research, we rate FALSE the claim that student loan forgiveness counts as federal taxable income. The American Rescue Plan Act specifically exempts student loan forgiveness from taxation at the federal level until the end of 2025. However, a number of states currently have policies that would impose state-level taxes.