Proposed Federal Budget Would Make Taxes on Most Student Loan Forgiveness More Expensive

A proposed federal budget bill would expand exceptions for Americans who receive student loan forgiveness in some cases but close the door on the same treatment in others.

The House of Representatives passed its proposed budget bill Thursday, advancing it to the Senate. The bill intends to reduce federal spending to make room for an expansion of President Donald Trump’s tax cuts.

The bill would increase taxes for many student loan borrowers. It could be reworked in the Senate before it becomes law.

Some Loan Forgiveness Tax Exemptions Are Staying, While An Important One Is Cut

Student loan borrowers in various repayment plans can meet certain requirements to have their loans forgiven after making a certain number of payments.

President Joe Biden’s administration also approved loan forgiveness for more than 1.4 million borrowers through multiple executive actions. He also expanded the Public Service Loan Forgiveness program, putting more borrowers on the path.

Borrowers who had their loans forgiven last year did not have to pay federal income taxes on it through a temporary provision added in 2021 through the American Rescue Plan Act. This provision expires at the end of 2025, meaning anyone who achieves that forgiveness this year also does not have it taxed as income.

The proposed budget bill does not extend that provision, meaning anyone who meets the criteria for forgiveness after this year would have their forgiveness taxed as income.

The bill does make one permanent exemption to that rule, though. This provision of the Tax Cuts and Jobs Act excludes loans forgiven on account of death or total and permanent disability from income taxes. The new version of this provision requires taxpayers to use a Social Security number to claim the exclusion.

Similarly, the bill will permanently exempt funds a borrower receives from an employer to pay down student debt. There is currently a $5,250 cap on the amount of those types of funds you can exempt, and this provision allows for cap adjustments to account for inflation.