The Basics of Student Loan Forgiveness
A Guide to Cancellations and Tax Implications
One of the greatest opportunities for college graduates stressed out about debt is student loan forgiveness or loan repayment programs. These programs offer to eliminate some or all of your student loans in return for choosing certain careers, military service, and even volunteer work.
Such programs can eliminate anywhere from a few thousand dollars to over $100,000 of student loans. Ironically, many of these programs receive a relatively small number of applications, indicating that many graduates are completely unaware of these opportunities.
Student loan forgiveness programs are those backed by the federal government and cover loans issued through federal programs such as Stafford and Perkins loans. When you participate in one of these programs, portions of your debt are erased from your lender’s books.
Student loan repayment programs, which are more widespread than forgiveness programs, are offered as employee recruitment or retention incentives from select employers. These programs may be used to eliminate any type of loan, including private loans. With student loan repayment, you either receive additional funds that you can use to pay down your loan, or a payment is made directly to your lender by your employer.
In March 2021, President Biden signed into law the American Rescue Plan Act, which includes a provision eliminating taxes on student loan forgiveness until the end of 2025.
Prior to the American Rescue Plan Act, the amount eliminated under loan forgiveness or repayment programs may be considered taxable income in the year received. In other words, if you have $5,000 in loans forgiven one year, that may increase your taxable income in the eyes of the IRS by an equivalent amount. While that is never fun, it should not discourage you from using one of these programs, since the benefit far outweighs the cost.
After 2025, to prevent your student loan forgiveness or employer repayments from becoming subject to taxation, your student loan must specifically include provisions allowing it to be forgiven. These provisions must require you to work within certain professions, for certain employers, for a specified minimum amount of time.
Additionally, any loan repayments made under the National Health Services Corps Repayment Program or any state program eligible for funds from the Public Health Services Act are considered tax-free.
Different Student Loan Repayment and Forgiveness Programs
There are hundreds of loan forgiveness programs available to graduates. Many times, professional associations within different industries will maintain a list of student loan repayment and forgiveness programs that apply to their profession.
Examples of some places to start researching the possibility of getting your student loans canceled or repaid (by profession) include the following.
- For Teachers: The American Federation of Teachers has a funding database to find funds for your continuing education, professional development, and classroom. Search also for loan forgiveness programs, teacher grants and awards, classroom donation programs, and summer studies and exchange programs.
- For Medical, Nursing, and Mental Health Professionals: With the typical medical school student entering the workforce with an average of $200,000 in student debt, The Association of Medical Colleges gives repayment options and loan forgiveness for medical professionals.
- For Lawyers and Legal Professionals: Most lawyers graduate from law school shouldering a $150,000 debt burden on average. The American Bar Association and Equal Justice Works offers strategies for loan repayment and loan forgiveness on the state and federal level.
- For Public Service and Volunteer Work: The Public Service Loan Forgiveness Program, created by an act of Congress in 2007, remains one of the best federal student loan forgiveness programs in existence. The program offers complete federal forgiveness benefits in return for qualifying public service work, meaning that it allows you to wipe out your outstanding federal loans in exchange for working in a public service field, like teaching, nursing, or government positions.