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With some exceptions, the IRS has historically treated forgiven student debt as taxable income. That, however, is not the case with Biden’s one-time student loan relief plan, should it pass current court challenges. (The case is now with the Supreme Court; a decision is expected in June.)

The reason the one-time, Covid-19-related forgiveness (of up to $20,000) wouldn’t be federally taxed? Five words: the American Rescue Plan Act. Passed in March 2021, the law specifies that student loan debt discharged between 2021 and through 2025 and incurred for postsecondary education expenses will not be counted as income, and therefore would not incur a federal tax liability.

That said, some states have indicated that they will still count canceled student loans as taxable income. Read on for more information about which discharged student debt is taxable and by whom.

Different Student Loan Forgiveness Programs

In addition to the president’s one-time, Covid-related debt cancellation plan, whose fate is with the Supreme Court, federal student debt can be canceled via an income-driven repayment plan or forgiveness programs.

For example, the Department of Education (ED) recently amended the Public Service Loan Forgiveness Program (PSLF) and the “borrower defense to repayment” program, and as a result, it has erased $7.3 billion in student loans for nonprofit and government employees who have remaining debt after 10 years or 120 payments and $7.9 billion for 690,000 borrowers whose education provider deceived them “or engaged in other misconduct in violation of certain state laws,” according to the ED’s Federal Student Aid office.

Also, during the current administration, the ED has been forgiving the student debt of certain borrowers: $3.9 billion for 208,000 students who attended ITT Technical Institute, a now-closed for-profit school; $5.8 billion for all former students of Corinthian Colleges, another shuttered, for-profit school; and more than $8.5 billion for 400,000 borrowers with a total and permanent disability.

Recommended: Guide to Student Loan Forgiveness

Whose Student Loan Cancellation Is Not Federally Taxed?

As stated earlier, under the provisions of the American Rescue Plan Act, any student debt (private or federal) for post-secondary education that was or is forgiven in the years of 2021 through 2025 will not be federally taxed. This means that the borrowers just listed above were not required to report their discharged loan amount as earned, and therefore taxable, income.

If Biden’s Covid-related student debt relief program survives the legal battle, recipients of that debt cancellation would also not be required to report their debt discharge as taxable income.

Outside of the special five-year window of tax exemption provided by the American Rescue Plan, participants of the PSLF program who receive forgiveness also don’t have to worry about paying taxes on the canceled amount. The program explicitly states that earned forgiveness through PSLF is not considered taxable income.

Whose Student Loan Cancellation Is Federally Taxed?

Typically, borrowers who receive loan cancellation after participating fully in an income-driven repayment plan can generally expect to pay taxes. Again, those whose debt was discharged in 2021 and 2022, or will be discharged in 2023, 2024, or 2025, will not need to pay federal taxes on their forgiven loans.

Forgiven amounts that are taxable are treated as earned income during the fiscal year it was received. Your lender might issue tax Form 1099-C to denote your debt cancellation.

💡 Quick Tip: Some student loan refinance lenders offer no fees, saving borrowers money. (Please note that refinancing student loans means losing access to federal protections and repayment programs.)

Which States Have Said They Will Tax Forgiven Student Loans?

Typically, states follow the tax policy of the federal government. But according to the Tax Policy Center, these six states have either indicated that they will tax discharged education debt or have laws on the books that don’t exempt forgiven student debt from taxes: Indiana, Minnesota, Mississippi, North Carolina, Wisconsin, and California. Additionally, the Arkansas legislature has yet to decide whether it will tax forgiven student loans.

In case you are wondering, only one of the states that have legally challenged the Biden forgiveness plan overlaps with states that will or may tax forgiven student loans: Arkansas. The other state plaintiffs in a case currently with the Supreme Court conform with the current federal definitions of taxable income, again, according to the Tax Policy Center: Nebraska, Missouri, Iowa, Kansas, and South Carolina.

Preparing to Pay Discharged Student Loan Taxes

If you’re anticipating a tax liability after receiving loan forgiveness, there are a few steps you can take today to get ready.

Step 1: Estimate Your Bill

The first step when bracing for a student loan forgiveness tax bill is calculating how much you might owe come tax season. This factor can be influenced by factors including the type of forgiveness you are receiving and the forgiven amount.

To avoid sticker shock, you can use a student loan forgiveness tax calculator, like the Loan Simulator on StudentAid.gov. It lets you see how much of your student loan debt might be forgiven, based on your projected earnings.

Step 2: Choose the Right Plan

Enrolling your federal student loans into an income-driven repayment (IDR) plan can help you keep your monthly payments to a manageable amount while you’re awaiting loan forgiveness. There are four IDR plans available: Pay As You Earn, Revised Pay As You Earn, Income-Contingent Repayment, and Income-Based Repayment.

All of these repayment plans calculate your monthly payment, based on your income and family size. Depending on your situation, you might be eligible for a $0 monthly payment.

Recommended: REPAYE vs PAYE: What’s the Difference?

Step 3: Prioritize Saving

If you’re expecting loan forgiveness after 2025, it might be advantageous to allocate extra cash flow toward a dedicated tax savings fund. Incrementally setting money aside over multiple years can ease the burden of a sudden lump sum tax bill down the line.

Paying Taxes on Canceled Student Loan

If you can’t afford to cover an increased tax bill, contact the IRS to discuss your options. Inquire about payment plans that can help you pay smaller tax payments over a longer period of time. However, be aware that fees and interest will likely accrue.

💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

The Takeaway

Thanks to a special law passed by Congress in 2021, post-secondary education loans forgiven from 2021 through 2025 will not count as earned income and will not be federally taxed. That said, state taxes may be due, depending on where the borrower lives.

Refi with SoFi today to get flexible terms and a competitive low rate before interest rates rise even higher!

FAQ

Is loan repayment considered taxable income?

If your employer offers loan repayment assistance benefits, they would typically be considered taxable income. However under the Cares Act, loan forgiveness payments — and employer assistance loan payments up to $5,250 — made each year from 2021 through 2025 are tax-free.

Will refinancing my student loans help me avoid taxes?

Student loan refinancing simply involves reworking one or more existing student loans into a new private loan with more favorable terms. It’s a repayment strategy that does not incur a tax liability.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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After getting approved for a student loan, there is one more step that must be completed before your funds are disbursed: the loan certification process. This step is designed to protect you as a borrower.

Keep reading to find out more about student loan certification, how long it takes, and the process for federal and private student loans.

What Is Student Loan Certification?

Student loan certification is a mandatory step before loan funds can be sent to your school. Your school will verify enrollment details, such as your expected graduation date, your year in the program, and the loan amount.

For private student loans, a Private Education Loan Applicant Self-Certification form is required. This highlights borrower-protection language, informs you of your ability to submit a FAFSA (Free Application for Federal Student Aid), and explains how a private loan might affect your other financial aid awards. The self-certification step also provides your lender with your enrollment details and financial aid received.

Recommended: FAFSA Guide

Why Do Lenders Need Student Loan Certification?

Student loan lenders must secure a certification before disbursement because it’s required by law, under the Higher Education Act of 1965 and the Truth in Lending Act.

Certification ensures that the lender and your school have done their due diligence to inform you about federal financial aid options, confirm that you meet academic enrollment requirements for the loan, and disclose the difference between your school’s cost of attendance (COA) and the financial assistance you’ve received for that period.

Recommended: The Ultimate Student Loan Terminology Cheat Sheet

Do Federal and Private Student Loan Lenders Need the Same Certification?

No, the loan certification process is different for federal vs. private student loans.

For federal aid, your school is responsible for determining the type of student aid you’re eligible for, including federal student loans. If your school finds that you’re eligible for federal loans, it will record its certification of your eligibility into the Common Origination and Disbursement system. This system tracks your loan data throughout your academic career.

The loan certification process for private lenders has a different intent. Your lender can request a completed Self-Certification form from you, which includes a section for your institution to fill out. Alternatively, your lender can communicate directly with your school for its certification sign-off.

Here’s a helpful refresher on how student loans work.

What Is the Process of Student Loan Certification?

After a lender approves your loan application and you accept the loan and its terms, the student loan certification process is automatically initiated. As a student borrower, you may not need to do anything. However, make sure to follow the process, via any emails or notifications from your lender or school, to make sure everything runs smoothly and no additional information is needed from you.

1. Lender Sends Loan Details to the School

The lender forwards your loan information to your school for certification. This includes details you’ve submitted during your application, like your personal information, enrollment information, and the loan amount requested.

2. School Reviews Loan Details

During this step, your school will certify that your enrollment details are correct, the estimated COA for the enrollment period, and how much aid you are receiving during the period.

Private student loan amounts can’t exceed a student’s COA, minus existing financial aid. If your loan details are correct and the amount is within the unfunded COA gap, the school can certify your loan with no changes.

Alternatively, the school can certify your loan with changes, either to reduce the loan amount or correct your enrollment information, if needed. It can also deny the loan certification, which might happen if it can’t verify that you’re enrolled or you already have sufficient financial aid to cover your COA.

Recommended: How To Apply for Student Loans

3. Your Lender Provides a Final Loan Disclosure

Your lender will notify you when your student loan certification is complete. At this time, it will provide you and your student loan cosigner, if applicable, with the final loan disclosure.

If your loan amount was lowered by your school, this is where you’ll see the new amount outlined in the updated disclosure agreement.

4. “Right-to-Cancel” Waiting Period

After the borrower has signed the final loan disclosure, lenders are not allowed to disburse funds right away. Federal law requires a waiting period of three business days after the lender sends you the final disclosure.

This is another layer of borrower protection that gives you time to cancel the loan, if desired, with no penalty.

5. Lender Disburses Loan Funds

After the waiting period expires, the lender can send certified student loan disbursements directly to your school, on the date requested by your institution.

How long school certification takes for a loan varies by school. Generally, it can take up to five weeks for schools to complete student loan certification, but sometimes it’s longer.

Additionally, loan certification is often done in the weeks before the start of classes. Enrollment status can change at the last minute, as when a student drops out or reduces their course load. The timing helps schools process certifications based on the most current information.

Is There Anything Student Borrowers Can Do to Hurry Along the Certification Process?

It’s true that the loan certification process can be lengthy. But there’s not much that can be done to hasten it. The best that student borrowers can do is to stay on top of emails and account notifications from their lender, informing them of status updates and next steps.

What Happens if a School Doesn’t Certify That You Are a Student?

If your school doesn’t certify your enrollment status, your lender can’t legally disburse the loan funds to your school. At best, this results in payment delays as you sort things out with your financial aid office. At worst, it halts disbursement entirely, if your school can’t certify that you are, in fact, an enrolled student.

What to Do if It Is the School’s Error

If you believe a mistake has been made on your student loan certification, contact your financial aid department immediately. Find out what the school needs from you to certify your enrollment and loan.

Additionally, ask what will happen to your enrolled courses while you figure out a resolution. The last thing you want is to get dropped from your classes.

What to Do if It Is the Student’s Error

Student loan certification might be in limbo because of an oversight on your part. This can come up, for example, if you forget to enroll in classes.

If you’re in this situation, reach out to your school’s admissions and records department, or your degree program’s department, for guidance about what you need to do. Make sure to note that you are waiting on private student loan certification needed for disbursement.

The Takeaway

The loan certification process can feel like another hurdle to overcome in financing your education. However, it’s a step that’s meant to protect student borrowers and keep you aware of your rights. The process and intent of certification are different for private student loans and federal student loans. If you do not get certified, don’t panic. Discuss the issue with your school to find out if the error is yours or the school’s, and take immediate steps to resolve it.

If you’ve exhausted your aid options and need additional funds to pay for school, consider a SoFi private student loan. Eligible borrowers can borrow up to their school’s cost of attendance, and there are no fees at all. Checking your interest rate online takes just minutes.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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