If you qualify for student loan forgiveness or discharge in full, and have applied if necessary, you will get a notification that you no longer need to make payments. In some cases, you may even get a refund, depending on the program you applied under. If only some of your debt is canceled or discharged, you’ll still be responsible for repaying the rest of what you owe. There may be consequences for your taxes, your credit score, and your overall financial health as well.
Key Takeaways
- When your student loan debt is forgiven, you’ll be sent notice of how much is canceled and whether you still owe anything more.
- If your loan is discharged because of fraud or deception on the part of the school, you may get a refund of some payments.
- The Supreme Court ruled the Biden administration's plan to forgive loan debt to be unconstitutional. Biden then announced an alternative plan to pursue forgiveness; however, that plan has also been blocked by federal courts.
- If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won’t be subject to federal income taxes, it may still be taxed at the state level.
Student Loan Forgiveness Programs
Your federal student loans may be canceled or discharged under several existing specialized programs or under more widespread income-based forgiveness programs being pursued by President Biden. Here’s how student loan forgiveness has evolved in the last year.
Biden’s Proposed Student Loan Forgiveness
The Supreme Court ruled on June 30, 2023, that the Higher Education Relief Opportunities for Students (HEROES) Act of 2003 did not give the Biden administration the authority to forgive student loan debt. Biden responded by providing a new plan for debt relief that reduces minimum payments for some borrowers and also reduces the number of years before loans are forgiven. At the same time, he announced that the Department of Education would pursue an alternative plan to provide student debt forgiveness.
Under Biden's original plan, you would have been eligible for this one-time loan forgiveness if you have federal student loans (private student loans are not eligible) and make less than $125,000 annually for individual borrowers or less than $250,000 annually for families.
If eligible, your loan servicer would have applied your debt relief directly to your account and then notified you if your debt had been paid in full or if there was any outstanding balance. In the latter scenario, the company also would have informed you of your new monthly payment.
The plan would have provided up to $20,000 in debt relief if you were a Pell Grant recipient and met the income requirements, while all other eligible borrowers who met the income requirements would have received up to $10,000 in debt relief.
A pause on student loan payments and interest began back in March 2020 and was extended multiple times throughout the pandemic. This pause ended on Sept. 1, 2023, when interest began accruing again, and payments resumed in October 2023.
After the one-time debt relief plan was struck down, the Biden-Harris administration announced another path to potential forgiveness—the Saving for a Valuable Education (SAVE) plan. Under the SAVE plan, monthly payments would be reduced based on income, with some borrowers eligible for $0 monthly payments, and most borrowers eligible for up to $1,000 of yearly savings. Sign-ups for the SAVE plan opened in August of 2023, although applications were paused in July 2024.
After ten years of payments, borrowers with initial balances of less than $12,000 are eligible for forgiveness. For those that have higher balances, the amount of time before forgiveness goes up proportionately, capping at 20 years for undergraduate loans and 25 for graduate loans. Past payments will count toward the total payment time.
On July 18, 2024, a federal appeals court blocked the SAVE plan. The Department of Education has moved borrowers enrolled in the SAVE plan into an interest-free forbearance while the Department of Education evaluates the rulings.
Public Service Loan Forgiveness (PSLF)
Employees of a U.S. federal, state, local, or tribal government or a not-for-profit organization may be eligible for a permanent program called Public Service Loan Forgiveness (PSLF). The PSLF program forgives any outstanding balance on an eligible borrower’s direct loans after they’ve made 120 qualifying monthly payments as part of a qualifying repayment plan, while also working full time for a qualifying employer. Due to the number and frequency of payments required, it can take at least 10 years before a borrower can qualify for PSLF.
Borrowers who wish to apply for PSLF should complete the Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application. After submitting the PSLF form, a PSLF servicer will review it to ensure that it’s complete and to determine whether your loans and employment qualify for the PSLF program.
Only direct loans made by the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness under PSLF.If you instead borrowed through either of two now-defunct programs—the Federal Family Education Loan (FFEL) Program or the Perkins Loan Program—you are allowed to consolidate those debts into adirect consolidation loan. The new consolidated loan is then eligible for PSLF.
When your PSLF form is approved, you will be notified that the remaining balance of your eligible direct loans will be forgiven. Any payments made after your 120th qualifying payment will be treated as overpayments and refunded to you.
The repayment plans that qualify for PSLF are the four income-driven repayment (IDR) plans: SAVE, Pay as You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
Payments made under the 10-year standard repayment plan can also be qualifying payments for PSLF. Keep in mind that payments may be higher under the 10-year Standard Repayment Plan versus an income-driven plan, depending on your income and the amount of student loan debt you have.
Income-driven repayment plans are also an option for some student loan forgiveness as remaining balances are forgiven at the end of the plan's timeframe. For borrowers unable to pay off their federal student loan debt within the typical 10-year time frame, income-driven repayment plans set a new monthly payment at an amount that is intended to be more affordable based on your income and family size.
Biden's SAVE plan is the newest iteration of these plans, but the program was blocked by federal courts in July 2024. As a result, the Department of Education outlined options for borrowers who were nearing Public Service Loan Forgiveness (PSLF)—borrowers can either "buy back" months of PSLF credit if they reach 120 months of payments while in forbearance or switch to a different IDR plan.
The tradeoff with any of these programs is that IDR plans typically have much longer repayment periods of either 20 or 25 years (depending on the plan), but any remaining loan balance will be forgiven by the end of those periods.
Teacher Loan Forgiveness
Some teachers with federal student loans can take advantage of the Teacher Loan Forgiveness Program. A highly qualified teacher holding a bachelor’s degree and full state certification as a teacher is eligible for this program if they have subsidized/unsubsidized direct loans and/or subsidized/unsubsidized Stafford loans as well as teach full time for five consecutive and complete academic years at an institution serving low-income students.
The maximum forgiveness amount available is $17,500 for secondary school mathematics and science teachers as well as highly qualified special education teachers or $5,000 for highly qualified full-time elementary or secondary education teachers.
You may be able to get your loan discharged if the school you went to misled you or engaged in misconduct of certain loan discharge through a program known as “borrower defense to loan repayment” forgiveness. Borrower defense now applies mainly to private, for-profit schools. To apply, you’ll need to submit an application on the Department of Education’s website with evidence that the school broke the law, significantly misled you, or misrepresented itself. If your application is approved, you would get a discharge, meaning you no longer owe the loan. You could possibly get a refund of some or all of your student loan payments as well.
What Happens to Your Credit?
It feels good to have your debt load lightened, but for a brief period of time, that assistance can work against you, as you might see your credit scores drop slightly. This occurs because student loans are a type of installment loan—like an auto loan. When this loan is erased from your credit history, it reduces the diversity of your credit lines. As a result, it may decrease your credit score—but again, only for a short period of time. And because credit mix only makes up 10% of your credit score, the dip shouldn’t be too dramatic.
However, there is good news: even if you fell behind on your payments before the pause began and your credit score took a hit. Once the loan forgiveness plan kicks in, the credit bureaus may delete any delinquent payments from your report. As a result, you could actually see a bump in your credit score. It’s important to keep an eye on your credit report once you receive confirmation that you were approved for student debt relief.
With certain types of student loan discharges, even if your student loan was in default, you may regain eligibility for federal student aid if you have not defaulted on other loans.
How Does Student Loan Forgiveness Affect Your Taxes?
Most student loan forgiveness is not taxed. Any loans that are canceled because you worked for a certain period of time in a certain profession are not taxable if forgiven. One exception is that debt forgiven through income-driven repayment forgiveness is usually considered taxable income.
However, thanks to a provision of the American Rescue Plan, all student loan debt relief won’t be treated as taxable income for federal income tax purposes from 2021 through 2025. However, some states will tax forgiven balances at the regular state income tax rate. And if the tax treatment is not extended after 2025, income-driven repayment forgiveness will once again become taxable at the federal level.
What Happens to Your Finances?
If you received a refund from your student loan payments or have just been benefiting from the forbearance period, consider this an opportunity to get ahead of your finances. For example, you can use your refund to pay down other higher-interest debt, such as car payments or credit cards, or use it to create an emergency fund for peace of mind.
If you have already been paying your student loan every month, move that payment over to a credit card, medical bill, or car payment, or designate it to go into your savings every month instead.
How Will I Find Out if I’m Approved for Student Loan Forgiveness?
If you have applied for forgiveness under a program like the PSLF or Teacher Loan Forgiveness program, your student loan servicer will notify you regarding your loan being forgiven totally, or partially with a remaining balance, depending on the program. Things would work similarly if you have paid for the required number of years under an income-driven plan and are having the rest forgiven.
Will Student Loan Forgiveness Help or Hurt My Credit Score?
A student loan being erased from your credit report may temporarily bring your score down a bit because it is part of your credit mix. On the plus side, the credit bureaus may also delete any delinquent loan payments from your credit report, which will help to raise your score. Eventually, your credit score may go up as your debt-to-income (DTI) ratio will be lower.
Will I Have to Pay Tax on the Forgiven Amount of Student Loan Debt?
Your student debt relief won’t be taxed on the federal level through the end of 2025 and forever for occupation-based programs. However, it may be considered taxable income at the state level, depending on where you live.
The Bottom Line
Student loan forgiveness plans are intended to provide relief for borrowers who are saddled with too much debt. Some are targeted at people who work in particular public service jobs for a certain length of time. After completing the required number of payments and services in a profession, if required, you will be notified if you are approved and provided further information on the forgiveness of your loan and any balance remaining, depending on the program.
If you still have an outstanding balance after forgiveness, you can work out a new repayment plan that suits your needs. You won’t be taxed federally on the forgiven amount for forgiveness occurring through the end of 2025 for income-driven payment plan forgiveness, and occupational-based forgiveness is always federally tax-free. While your credit score could dip slightly, it won’t be too much or for too long.
