Public Interest Law Section Blog: Tip of the Month: Tax Implications of Public Service Loan Forgiveness:

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  • Public Interest Law Section Blog
    February
    03
    2020

    Tip of the Month: Tax Implications of Public Service Loan Forgiveness

    Amy R. Devine

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    If your student loans are forgiven as part of the Public Service Loan Forgiveness (PSLF) program, are they taxed? Amy Devine discusses the tax implications of student loans and forgiveness programs.
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    The start of a new year is a great time to get hold of your finances and think about where you can save money. It’s also a great time to think about taxes (or procrastinate until April when you have no choice but to think about your taxes).

    So, how does the Public Service Loan Forgiveness (PSLF) program fit into your tax plan?1

    About the Program

    The PSLF program has a number of requirements that must be followed exactly in order to take advantage of the program.

    Amy Devine com amy hsbelderlaw Amy Devine, City University of New York 2006, is an attorney with Haskins, Short, and Brindley, LLC, in Monona.

    The PSLF program is a loan forgiveness program for individuals, including attorneys, who work full time for a 501(c)(3) not-for-profit organization, governmental organization, or another not-for-profit organization that meets specific criteria under the program – i.e., provides a “qualifying public service.” Individual must make 120 qualifying payments toward repaying their loan before becoming eligible for loan forgiveness.2

    Not all loans are considered “eligible loans,” so it is important to review which loans you have,3 whether or not you have consolidated any loans, and the timing of your payments on eligible loans.

    Tax Implications

    Often loan forgiveness programs count the debt that is forgiven or canceled as income for taxes purposes.

    However, there are certain exceptions to this rule. Any student loan debt forgiven under the Public Service Loan Forgiveness program is not taxed by the Internal Revenue Service (IRS).4

    Again, you will need to pay attention to all the other requirements of the PSLF program and determine whether all of your loans are eligible to be part of the program when thinking about the cancellation of your law school debt.

    However, if your loans are eligible and subsequently canceled through the PSLF program, any debt that is canceled as part of the Public Service Loan Forgiveness program is not taxed. These rules also apply for the Teacher Loan Forgiveness plan and the National Health Service Corps Loan Repayment program.

    Non-PSLF Loan Forgiveness

    For the loan forgiveness programs that do not fall under the PSLF program or the other above-mentioned programs, there is the potential for large tax liabilities. Without the PSLF program, income-drive repayment plans could leave borrowers with large tax liabilities if the loan is discharged.

    The Internal Revenue Code notes that the discharge of any debt is included in your calculation of gross income.5 How much money you ultimately may owe in taxes depends on the amount of debt that is forgiven and your income tax bracket.

    Thankfully for those who are able to take advantage of the Public Service Loan Forgiveness program, after making 120 payments, they can at least be free of the worry of a large tax liability.

    For More Information

    For more information, see these resources:

    Endnotes

    1 For more information, the State Bar of Wisconsin Public Interest Law Section has produced three blog articles on the PSLF program:

    2 Public Service Loan Forgiveness FAQs.

    3 Keep an eye out for a future PILS blog post on the types of eligible loans and repayment programs.

    4 I.R.C. § 108(f)(1).

    5 I.R.C. § 61(a)(11).





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