What Happens When Your Student Loans Are Forgiven?

If you qualify for student loan forgiveness or discharge in full, you will get a notification and will no longer need to make payments. In some cases, you may even get a refund. If only some of your debt is canceled or discharged, you’ll still be responsible for repaying the rest of what you owe. There may be consequences for your taxes, your credit score, and your overall financial health as well.

Key Takeaways

When your student loan debt is forgiven, you’ll be sent notice of how much is canceled and whether you still owe anything more.
If your loan is discharged because of fraud or deception on the part of the school, you may get a refund of some payments.
With President Biden’s proposed forgiveness plan, if you paid off some or all of your student loan debt during the forbearance period, these payments may be automatically refunded, up to the remaining amount of your eligible debt relief.
If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won’t be subject to federal income taxes, it may still be taxed at the state level.

Student Loan Forgiveness Programs

Your federal student loans may be canceled or discharged under a number of existing specialized programs, or under a more widespread forgiveness program proposed by President Biden but challenged in court. Here’s how student loan forgiveness may play out.

Biden’s Proposed Student Loan Forgiveness

If the Biden proposal is allowed to proceed, the U.S. Department of Education will determine if you have met the requirements and, if so, will notify your loan servicer. As a reminder, you are eligible for this one-time loan forgiveness if you have federal student loans (private student loans are not eligible) and make less than $125,000 annually for individual borrowers or less than $250,000 annually for families.

If you are eligible, your loan servicer will then apply your debt relief directly to your account, and it will then notify you if your debt has been paid in full or if there is any outstanding balance. In the latter scenario, the company will also inform you of your new monthly payment. If you have more than one loan servicer, they will each notify you separately.

You will receive up to $20,000 in debt relief if you are a Pell Grant recipient and meet the income requirements, while all other eligible borrowers who meet the income requirements will receive up to $10,000 in debt relief.

A pause on student loan payments and interest began back in March 2020 and was extended multiple times throughout the pandemic. On Nov. 11, 2022, the Department of Education stopped accepting applications for student loan forgiveness after federal courts issued orders blocking the Biden administration’s plan. Student loan payments are now scheduled to resume 60 days after the U.S. Supreme Court announces its ruling or 60 days after June 30, 2023, if there hasn’t been a verdict before then.

If you continued to make your student loan payments during this forbearance period and have applied for the student loan forgiveness plan, you may be eligible for a refund of these payments, though that depends on how much you owe. You will automatically be refunded the amount you paid during the payment pause, up to the remaining amount of your eligible debt relief.

However, if your student loan balance is greater than the amount of debt relief you will receive, you won’t be eligible to automatically receive a refund. If you still want to apply a refund for the payments you made during the payment pause, you should contact your loan servicer.

Public Service Loan Forgiveness (PSLF)

Employees of a U.S. federal, state, local, or tribal government or not-for-profit organization may be eligible for a permanent program called Public Service Loan Forgiveness (PSLF). The PSLF program forgives any outstanding balance on an eligible borrower’s direct loans after they’ve made 120 qualifying monthly payments as part of a qualifying repayment plan, while also working full time for a qualifying employer. Due to the number and frequency of payments required, it can take at least 10 years before a borrower can qualify for PSLF.

Borrowers who wish to apply for PSLF should complete the Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application. After submitting the PSLF form, a PSLF servicer will review it to ensure that it’s complete and to determine whether your loans and employment qualify for the PSLF program.

Only direct loans made by the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness under PSLF. If you instead borrowed through either of two now-defunct programs—the Federal Family Education Loan (FFEL) Program or the Perkins Loan Program—you are allowed to consolidate those debts into a direct consolidation loan. The new consolidated loan is then eligible for PSLF.

When your PSLF form is approved, you will be notified that the remaining balance of your eligible direct loans will be forgiven. Any payments made after your 120th qualifying payment will be treated as overpayments and refunded to you.

The repayment plans that qualify for PSLF are the four income-driven repayment (IDR) plans: Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

Payments made under the 10-year Standard Repayment Plan can also be qualifying payments for PSLF, but you would have to first switch to an IDR plan. However, keep in mind that payments may increase under a 10-year Standard Repayment Plan depending on your income and the amount of student loan debt you have.

Income-driven repayment plans are also an option for some student loan forgiveness. For borrowers unable to pay off their federal student loan debt within the typical 10-year time frame, income-driven repayment plans set a new monthly payment at an amount that is intended to be more affordable based on your income and family size.

The tradeoff is that income-driven repayment plans have much longer repayment periods of either 20 or 25 years (depending on the plan), but any remaining loan balance will be forgiven by the end of those periods.

On Aug. 24, 2022, the Biden administration proposed a new income-driven plan for undergraduate student loan repayment that caps monthly payments at 5% of your monthly income instead of 10%. After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.

Teacher Loan Forgiveness

Some teachers with federal student loans can take advantage of the Teacher Loan Forgiveness Program. A highly qualified teacher holding a bachelor’s degree and full state certification as a teacher is eligible for this program if they have subsidized/unsubsidized direct loans and/or subsidized/unsubsidized Stafford loans as well as teach full time for five consecutive and complete academic years at an institution serving low-income students.

The maximum forgiveness amount available is $17,500 for secondary school mathematics and science teachers as well as highly qualified special education teachers or $5,000 for highly qualified full-time elementary or secondary education teachers.

You may be able to get your loan discharged if the school you went to misled you or engaged in misconduct of certain loan discharge through a program known as “borrower defense to loan repayment” forgiveness. Borrower defense now applies mainly to private, for-profit schools.

To apply, you’ll need to submit an application on the Department of Education’s website with evidence that the school broke the law, significantly misled you, or misrepresented itself. If your application is approved, you may get a discharge and possibly a refund of some or all of your student loans. You would no longer have to repay the loan and may have some of your past payments refunded.

What Happens to Your Credit?

It feels good to have your debt load lightened, but for a brief period of time, that assistance can work against you, as you might see your credit scores drop slightly. This occurs because student loans are a type of installment loan—like an auto loan. When this loan is erased from your credit history, it reduces the diversity of your credit lines. As a result, it may decrease your credit score—but again, only for a short period of time. And because credit mix only makes up 10% of your credit score, the dip shouldn’t be too dramatic.

However, there is good news, even if you fell behind on your payments before the pause began and your credit score took a hit. Once the loan forgiveness plan kicks in, the credit bureaus may delete any delinquent payments from your report. As a result, you could actually see a bump in your credit score. It’s important to keep an eye on your credit report once you receive confirmation that you were approved for debt relief.

With certain types of student loan discharges, even if your student loan was in default, you may regain eligibility for federal student aid if you have not defaulted on other loans.

How Does Student Loan Forgiveness Affect Your Taxes?

Most student loan forgiveness is not taxed. Any loans that are canceled because you worked for a certain period of time in a certain profession are not taxable if forgiven. One exception is that debt forgiven through income-driven repayment forgiveness is usually considered taxable income.

However, thanks to a provision of the American Rescue Plan, all student loan debt relief won’t be treated as taxable income for federal income tax purposes from 2021 through 2025. However, some states will tax forgiven balances at the regular state income tax rate. And if the tax treatment is not extended after 2025, income-driven repayment forgiveness will once again become taxable at the federal level.

What Happens to Your Finances?

If you received a refund from your student loan payments, or even if you have just been benefiting from the forbearance period, consider this an opportunity to get ahead of your finances. For example, you can use your refund to pay down other higher-interest debt, such as car payments or credit cards, or use it to create an emergency fund for peace of mind.

If you have already been paying your student loan every month, move that payment over to a credit card, medical bill, or car payment, or designate it to go into your savings every month instead.

How will I find out if I’m approved for student loan forgiveness?

Your student loan servicer will notify you regarding how much student debt relief you received and whether you have a remaining balance on your education loans.

Will student loan forgiveness help or hurt my credit score?

A student loan being erased from your credit report may temporarily bring your score down a bit because it is part of your credit mix. On the plus side, the credit bureaus may also delete any delinquent loan payments from your credit report, which will help to raise your score.

Will I have to pay tax on the forgiven amount of student loan debt?

Your student debt relief won’t be taxed on the federal level, but it may be considered taxable income at the state level, depending on where you live.

The Bottom Line

Student loan forgiveness plans are intended to provide relief for borrowers who are saddled with too much debt. Some are targeted at people who work in particular public service jobs for a certain length of time. You will be notified if you are approved and provided further information on how much of your debt balance will be paid.

If you still have an outstanding balance after forgiveness, you can work out a new repayment plan that suits your needs. You won’t be taxed on the forgiven amount, and while your credit score could dip slightly, it won’t be too much or for too long.