In the coming months, millions more will benefit from student loan forgiveness programs.

Among all of the good news, there is a growing concern about tax bills. Does student loan forgiveness get taxed? Are refunds from lenders taxable?

Spoiler Alert: In most cases, both the forgiveness and the refunds are tax-free.

Student Loan Refunds: Highly Unlikely to Get Taxed

To understand this concept, let’s be crystal clear about what it means to get a refund: A refund is an overpayment of a bill or debt.

For example, suppose you accidentally paid your credit card company $500 when your bill was only $50. When you get that $450 put back in your checking account, there isn’t any tax liability. A refund on an overpayment of a student loan is the same thing.

Sherpa Clarification: The title of this section says that refunds are “highly unlikely to get taxed” instead of plainly saying they don’t get taxed. My phrasing here is partly a lawyer thing: by qualifying my language, I won’t be wrong if someone gets taxed on a refund.

However, the primary reason for using terms like probably and usually is that there isn’t a uniform set of tax laws. There are federal taxes, state taxes, and local taxes. Within each jurisdiction, there can be some crazy rules.

Where I can, I’ll point out where some states might behave differently than the majority. However, analyzing every state and locality isn’t practical or useful.

PSLF Forgiveness: Not Taxed at Federal Level, States Vary

First, the good news on Public Service Loan Forgiveness: by statute, the federal government does not tax PSLF forgiveness.

States are a different story.

However, the news on this front is still mostly good. Some states don’t have an income tax. In these states, there isn’t a tax bill from PSLF. Likewise, many states follow the federal government in defining income. In these states, PSLF isn’t taxed.

Sadly, in a handful of states, taxes may become an issue.

An interesting component in this analysis is that state laws are rapidly changing. Some states are passing emergency legislation to remove a tax liability on loan forgiveness, while others are passing legislation to tax forgiveness. The best way to find out up-to-date tax rules in your state is to simply Google “PSLF Tax [your state].”

Biden Forgiveness: Not Taxed at Federal Level, Some States Tax

The Biden adminstration previously tried to cancel $10,000 per student loan borrower, the will be adjusting IDR payment counts to forgive debt for many more borrowers, and they are attempting another round of forgiveness for some borrowers.

These forms of forgiveness are all different, but they all are called Biden forgiveness by some borrowers and the tax rules for each type are identical.

Through 2025, there isn’t a federal tax on student loan forgiveness. However, as things stand now, the tax bomb is set to return in 2026. This will require some planning for borrowers on IDR plans, but those who get forgiveness before 2026 won’t have to worry.

At the state level, it’s possible that a state that doesn’t tax PSLF might still tax the one-time forgiveness. As things stand right now, that is the rule in Indiana, and it appears unlikely to change.

If you live in North Carolina, Indiana, Mississippi, Arkansas, or Wisconsin, you may have to pay a tax on one-time forgiveness. However, your state may change its rules moving forward.

What about payments made for others or by others?

Another tax concern for student loan borrowers comes in the form of student loan repayment help.

Suppose a family member is generous enough to pay off some or all of your student debt. Does that help get taxed?

The good news for borrowers is that this help falls into the category of gift taxes. For the recipient of the gift, there isn’t a tax bill. However, the gift-giver may have to pay a gift tax.

In the case of student loans and gift taxes, there are several exceptions that can help most people completely avoid a tax bill.

The post Student Loan Forgiveness and Refunds: What Gets Taxed appeared first on The Student Loan Sherpa.

Sadly, the group of borrowers eligible for refunds is relatively small. Those eligible could receive checks for thousands of dollars, however.

Who Gets a Refund Under the Biden Forgiveness Automatic Refund Policy?

The Department of Education recently updated the loan cancellation guide with a valuable nugget of information.

Under the policy, you can qualify for a refund if:

1. You successfully apply for and receive debt relief under the Administration’s debt relief plan, AND
2. Your voluntary payments during the payment pause brought your balance below the maximum debt relief amount you’re eligible to receive but did not pay off your loan in full.

There is an interesting workaround for the people who paid in full. But for now, let’s first look at an example of how the automatic refund works:

If you qualify for $10,000 in forgiveness and reduced your balance from $10,500 to $9,500 during the pandemic, you could get a refund of $500 when your remaining balance of $9,500 is canceled.

Why Issue Automatic Refunds?

The automated refund policy makes sense for a couple of important reasons.

For starters, it is more fair. Borrowers have been able to request refunds for payments made during the pandemic, but not everyone knows about this policy. Refunds shouldn’t be limited to borrowers who understand the fine print of an unrelated procedure.

Additionally, and perhaps more importantly, servicers will be slammed over the next few months. If borrowers don’t have to call in to ask for a refund, that is one less issue for customer service representatives to address.

While the automated refund policy is excellent for borrowers in general, I still suggest that readers of this site manually request a refund right away.

Requesting a Manual Refund is the Best Strategy

If you made extra payments during the payment pause, there are two advantages to asking for a refund right now.

First, you will potentially receive the refund quicker. You can call today and start the process immediately. The application for forgiveness won’t be available until next month at the earliest. The sooner you get your money back, the better.

Secondly, asking for a refund right away helps prevent frustrating servicer errors. Going back to the example of the borrower expecting a $500 refund, imagine for a second that there was a mistake in processing the forgiveness application. The $9,500 was forgiven, but no refund was issued. If that happens, the loan is paid in full, and requesting a refund becomes even more challenging. In this case, by anticipating a potential mistake, we can avoid a difficult situation.

If you paid off your loan in full during the pandemic, you will want to request a refund.

Refunds for Borrowers who Paid in Full

If you have paid in full, there are two rules to understand.

If your federal student loan balance is paid in full:

1. You do not get a refund under the automated refund policy, and
2. You are not eligible for the Biden Forgiveness Program.

However, if you are in the category of people who paid off their loans during the pandemic, there is a workaround.

According to the non-profit Student Borrower Protection Center, all borrowers who made payments on their federally-held loans can request a refund on all of these payments. Notably, they say this policy includes borrowers who paid off their debt in full.

Thus, if you have paid off your loan in full, you should immediately call your servicer and ask for a refund. Once the refund is issued, you again have a loan with a balance owed, and that loan is eligible for cancellation under the Biden Forgiveness Program.

For some borrowers, this could put an extra $20,000 in their pockets.

Tips for Getting the Refund

Call your servicer right away. The longer you wait, the longer the hold times are likely to be. Additionally, processing a refund request can take several weeks. There isn’t a benefit to dragging your feet on this one. If you are unsure of who services your loans, check the federal database.

Call again if you don’t get the help you need. Servicers are overwhelmed, and some employees are better than others. If the person you talk to doesn’t understand the rules or can’t help, hang up and call again. This is a tedious strategy, especially if there are long hold times, but it helps ensure the best outcome.

Be patient but persistent. The refund request can take weeks or months to get paid. The forgiveness application won’t be available until October at the earliest. However, the repayment restart begins on January 1, 2023. It’s a tight timeline when you factor in processing times. Borrowers should stay on top of things but also understand that nothing happens overnight.

The post Some Borrowers Will Get Huge Refunds From Biden Student Loan Forgiveness appeared first on The Student Loan Sherpa.