Expert Verified by: David Chen, CFA | Updated October 2023
If your student loans are forgiven, the IRS may treat the canceled debt as taxable income. Use our Student Loan Forgiveness Tax Calculator to estimate how much you might owe in federal taxes based on your current marginal tax rate and the amount of debt forgiven.
Student Loan Forgiveness Tax Calculator
Student Loan Forgiveness Tax Calculator Formula:
Tax Liability = Forgiven Amount × (Marginal Tax Rate / 100)
Sources: IRS Publication 431, StudentAid.gov
Variables:
- Forgiven Loan Amount: The total balance of the student loan that is being canceled or discharged.
- Marginal Tax Rate: The percentage of tax applied to your highest dollar of income.
- Estimated Tax Liability: The total amount of tax you may owe to the IRS as a result of the debt cancellation.
Related Calculators:
What is Student Loan Forgiveness Tax Calculator?
A Student Loan Forgiveness Tax Calculator is a specialized financial tool designed to help borrowers anticipate the “tax bomb” that often accompanies debt cancellation. Under current federal law, forgiven debt is generally considered “taxable income,” meaning if you have $20,000 forgiven, the IRS views it as if you earned an additional $20,000 in income that year.
This calculator helps you determine whether you should set aside funds for an upcoming tax bill. Note that the American Rescue Plan Act currently exempts federal student loan forgiveness from federal taxes through 2025, but state taxes may still apply in certain jurisdictions.
How to Calculate Student Loan Forgiveness Tax (Example):
- Determine the total amount of debt to be forgiven (e.g., $10,000).
- Find your marginal tax bracket (e.g., 22%).
- Multiply the amount by the decimal version of the rate ($10,000 × 0.22).
- The result ($2,200) is your estimated federal tax liability.
Frequently Asked Questions (FAQ):
Is student loan forgiveness always taxable?
No. Programs like PSLF (Public Service Loan Forgiveness) are tax-free at the federal level. Also, federal forgiveness is temporarily tax-exempt through 2025 under current legislation.
Will my state tax my forgiven student loans?
Some states, like Mississippi and Indiana, may still tax forgiven student loans as income even if the federal government does not.
How do I pay the tax bill?
You typically pay it when you file your annual tax return. If the amount is large, you may need to make estimated quarterly payments to avoid penalties.
What if I can’t afford the tax bill?
The IRS offers payment plans and “Offers in Compromise” if you are insolvent or unable to pay the full amount immediately.