New laws allow a one-time debt relief (cancellation) of up to $20,000 for a Federal Pell Grant while in college or up to $10,000 if you didn’t receive a Federal Pell Grant in college but received another type of loan (see the U.S. Department of Education website for a listing of eligible loans). The debt relief applies only to loan balances you had before June 30, 2022. Parents with eligible student loans of their own can submit their own application for debt relief that will be processed separately from the one your child submits.
Generally, debt cancellation is subject to taxes. However, this one-time debt cancellation will not be taxed on your federal return if your adjusted gross income (AGI) levels on either your 2020 or 2021 fall into one of the following categories: You did not file taxes; you made less than the required income to file federal taxes; you are a single filer earning less than $125,000 adjusted gross income (AGI); you are married, filed separately and earned less than $125,000 AGI; you are married, filed jointly and earned less than $250,000 AGI; you filed head of household and earned less than $250,000; or you are a qualifying widow(er) and earned less than $250,000.
Although you won’t have to pay federal taxes on your loan cancellation, currently Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin will tax the amount of debt cancelled.
At the time of this writing, the application portal is open, but debt discharged is paused as the result of a court order. However, the Department of Education encourages eligible taxpayers to apply, and they will continue to review applications and be ready to process discharges when they are able to, without the need to reapply. The application portal is open through December 31, 2023. For more information, visit the United States Department of Education website.