Is a student loan considered income?

It feels like you’re collecting income when you receive student loan money, but does the Internal Revenue Service see it that way? What if the debt is eventually forgiven, settled or paid off by a relative? It’s crucial to know if this financial aid is treated as taxable earnings.

During college

If you obtain educational funding from a lender and eventually pay it back, the cash won’t be considered income. This money isn’t taxable because you’ve borrowed it. The IRS will tax the future wages that you’ll use for student loan repayment, so it wouldn’t be fair to tax the loan funds as well.

However, this rule doesn’t always apply to all financial aid. When a grant, athletic stipend or scholarship surpasses the cost of college-related fees and tuition, the excess portion may become taxable. Likewise, the IRS treats employer college assistance as income if it exceeds a certain amount.

Debt settlement

After you’ve stopped attending college, you might eventually negotiate a settlement that reduces your loan balance. The government will probably consider any canceled student loan debt to be income. You could have to pay federal and/or state taxes on it. The lender should supply a 1099-C form that shows how much money is taxable.

Forgiveness

You could qualify for student loan forgiveness in the future, especially if the debt has yet to be repaid after 20 years. Unfortunately, the forgiven balance is often taxed. The good news is that some disabled individuals, people with little income and nonprofit or government workers are exempt.

Benefactors

If you’re lucky, a wealthy relative or friend might decide to pay off your remaining balance. This assistance normally isn’t treated as income and won’t increase your tax bill. On the other hand, your benefactor may owe a gift tax if the amount exceeds a specific limit.

The bottom line is that you’ll probably only owe cash to the IRS if student loan money is forgiven or settled, and there are several ways to gain exemptions from this tax. Student Loanify helps borrowers learn more about repayment options and find solutions that make monthly payments more affordable.