Written By Adam S. Minsky, JD
The 2024 tax filing deadline is a mere eight weeks away. While some people might wait until the last minute to file their taxes, others are getting their documents in order now.
For student loan borrowers, the environment is as complex as ever, with a broad array of new programs, laws, temporary initiatives, and expiring exemptions. But there are a number of issues borrowers should consider before filing taxes in 2024.
Here’s what you need to know.
Student loan forgiveness isn’t taxable – mostly
Despite 2023’s Supreme Court ruling that blocked President Biden’s signature student debt relief plan (which would have forgiven up to $20,000 in federal student loans for upwards of 30 million borrowers), the administration has been plowing ahead with so-called targeted student loan forgiveness initiatives. Through executive action and regulatory reforms, the Education Department has expanded debt relief access for many borrowers.
Over three and a half million borrowers have collectively been approved for $135 billion in student loan forgiveness. This includes debt relief through Public Service Loan Forgiveness (PSLF), Income-Driven Repayment (IDR) Account Adjustment, Borrower Defense to Repayment and Closed School Discharges. Much of that forgiveness was approved in 2023, though relief is ongoing.
In most cases, federal student loan forgiveness is not taxable. Thanks to the American Rescue Plan, a massive stimulus package passed by Democrats and signed by President Biden in 2021, exempts student loan forgiveness from taxation through the end of 2025.
As a result, the Education Department will not be issuing a Form 1099-C — requiring borrowers to report canceled debt as income for tax purposes — to borrowers who received student loan forgiveness last year.
The exception: It depends on your state and forgiveness program
But there are some exceptions to this broad temporary rule that student loan forgiveness isn’t taxable. First, some states may still treat forgiven debt as taxable income, even if the federal government does not. While most states mirror federal tax policy, some have their own laws that require taxpayers to report canceled debt as income.
Second, borrowers who received a Total and Permanent Disability (TPD) discharge in 2023 could face tax liability after 2025. The Education Department won’t consider federal student loan debt to be truly “discharged” until after a three-year monitoring period ends. That means borrowers who received TPD relief in 2023 could get a 1099-C after 2025 if Congress does not extend the temporary federal tax exemption.
Borrowers who received student loan forgiveness in 2023 should consult with their tax advisor to get appropriate guidance.
Some student loan interest could be tax deductible — But double-check the numbers
The Covid-era student loan pause finally came to an end in 2023 after three and a half years of suspended payments. Millions resumed federal student loan repayment for the first time since March 2020.
Student loan interest paid during the year can be tax deductible in some cases. Borrowers eligible for this deduction should receive a Form 1098-E from their loan servicer. However, the 1098-E statement from 2023 may show little or no interest paid.
That’s because most borrowers did not actually need to start making payments on their loans until October 2023 at the earliest. And millions of borrowers were subsequently placed into administrative forbearance due to loan servicing issues such as erroneous billing statements, processing delays, and miscalculated payments — so some borrowers paid no interest at all in 2023.
In addition, borrowers who consolidated student loans in 2023 might get a 1098-E statement suggesting interest was paid on their loans when in fact, they did not do so — they simply consolidated their student loans. Borrowers should consult with their tax advisor about how to handle this situation.
Related: How to Qualify for a Student Loan Tax Deduction When You Least Expect It
Student loan borrowers: Review your adjusted gross income
Borrowers under income-driven repayment (IDR) plans should evaluate strategies for lowering their adjusted gross income (AGI), a key figure on their federal tax return. A lower AGI can lead to lower student loan payments; contributing more to certain retirement accounts or a Health Spending Account (HSA) can help further that goal.
Married borrowers might consider filing taxes as married filing separately. Under IDR plans, monthly payments are based on the combined income of a borrower and their spouse if they file taxes jointly. Filing separately excludes spousal income, so their IDR payment is based on the borrower’s income alone.
This is even true under Biden’s new Saving on a Valuable Education (SAVE) plan, which replaced the older Revised Pay As You Earn (REPAYE) plan. REPAYE did not allow for this marital tax filing flexibility. If you’re married and were previously enrolled in REPAYE (and are now in the SAVE plan), taking a look at marital tax filing status could be worthwhile.
A word of caution: Higher tax liability and community property states
However, filing taxes separately can cause some couples to pay more in taxes. And things can get a bit complicated if you live in a community property state. So, if you’re enrolled in SAVE or another IDR plan, check with your tax advisor about marital tax filing status and the implications of filing taxes separately.
Automatic AGI sharing from the IRS
Borrowers enrolled in an IDR plan should also be aware of a new option for automatic income recertification.
Under a new data-sharing tool, borrowers can give permission for the Department of Education and the IRS to communicate with each other annually about your taxable income. This way, your monthly IDR payment can be adjusted automatically, without the need for a manual income recertification application, via the department’s IDR application portal.
Related: How to Revoke Access for the IRS to Share Your Income for Student Loans
New retirement benefit for student loan borrowers
While you’re evaluating ways to reduce AGI, it may also be worthwhile to check in with your employer about retirement contributions.
Under the Secure Act 2.0, which was passed in 2023 by Congress and signed by President Biden, employers can now offer a new benefit for student loan borrowers where they match your student loan payments in retirement contributions. In other words, if you pay, say, $200 a month in student loan payments, your employer could contribute $200 a month to your employer-sponsored retirement account, like a 401(k). This can allow borrowers to pay down their student debt while also saving for retirement.
Participation in this new benefit is not mandatory, and of course, certain rules and conditions apply. But check with your employer to see if this might be an option.
