Of all of the questions swirling around the news and social media about the White House’s recently announced tuition debt relief program, one question seems to be missing – Is Tuition Relief Taxable? Generally speaking, the amount of debt relief or forgiveness is taxable and added to the income reported on one’s income tax return in the year of relief or forgiveness. So, debt relief is usually not free of cost.
Sure, paying the tax on debt relief doesn’t cost as much as paying the debt itself, but it’s not as much financial relief as wiping out the obligation entirely. People who experience financial challenges and end up with discharged credit card balances still face a financial challenge – the resulting tax bill. The federal and state income tax due on $20,000 of discharged credit card debt could be about $3,000, depending on the circumstances, like the federal marginal tax bracket and state tax rate.
The tuition debt relief package announced by the White House is part of an exception to the general tax rules about the taxation of debt relief. The American Rescue Plan, signed into law in March 2021, allows an individual to exclude from gross income the amount of qualified student loans canceled or discharged from 2021 through 2025. That includes qualified student loans for post-secondary education provided by the government or educational institutions; private education loans, and original and refinanced loans from tax-exempt organizations with a public service requirement; and refinanced loans.
Details about the tuition debt relief program are contained in this August 24, 2022, fact sheet. According to the fact sheet, the new tuition debt relief program will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. The program is open to borrowers with individual incomes of up to $125,000 or up to $250,000 for married couples. In addition, federal student loan payments will continue to be paused through the end of 2022.
News articles and social media feeds are full of questions and comments about the tuition debt relief package announced by the White House last week. One question that seems to be missing is about whether tuition debt relief is taxable. Goods news – qualified student loans are excluded from taxable income from 2021 to 2025. That means a zero tax bill and no added financial challenges from the relief or forgiveness of qualified student loans.