What Happens Next If Your Student Loans Are Forgiven?

If your federal student loans are forgiven, you could get a refund, and you might see your credit score dip.
Anna Helhoski
By Anna Helhoski 
Edited by Karen Gaudette Brewer

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Once your federal student loans are forgiven through one of the existing discharge programs, you can finally exhale and relax those long-burdened shoulders. But after the relief passes, what happens next?

Here’s what you can expect:

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You’ll be notified or see a $0 balance

You will receive notification of your loan discharge via email, mail and/or your online loan servicing account (depending how your communication preferences are set). It will also be reflected when you log in to the Federal Student Aid site using your FSA ID. When you log in to your accounts, your balance should be $0.

From this point on, your days of making monthly student loan payments are over.

That is, unless, only a portion of your debt is canceled. If you still owe a remaining balance, you will still continue to owe monthly payments.

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You could get a refund

Loan discharge has additional results:

  • You could get a refund. Depending on the type of discharge you receive, you could receive a refund of some or all payments you made on the loan.

  • Negative marks on your credit could disappear. Any adverse record on your credit history (such as delinquency or default) could be wiped clean, depending on the type of discharge you had.

  • You could regain eligibility for federal student aid. Default disqualifies borrowers from receiving federal student aid. If cancellation wipes your default, you would be eligible again for financial aid.

Your credit score could dip slightly

When your student loan is at “paid off” status, either through making a last payment or through debt cancellation, you could see a minor ding to your credit score. It seems counterintuitive; shouldn’t getting rid of debt be good for your credit?

But student loans are considered installment loans — loans in a set amount you pay off over time with interest — similar to auto loans or home loans. The U.S. credit system rewards you for having a mix of credit types. When you eliminate an account (like a student loan), it signals you no longer have an installment loan account in the mix.

Even though your credit score could temporarily decrease, not having student debt is ultimately beneficial for your credit history; having a debt paid off shows you’re a reliable borrower.

Paying off a loan isn’t reflected in your credit scores. But it does improve your overall financial picture by reducing your debt-to-income ratio. That may help you qualify for or get a better rate on a home or auto purchase.

You can check all three major credit bureaus’ reports each week for free indefinitely, or you can check a free credit report from TransUnion through NerdWallet as often as you like.

Tax implications are unlikely

Most loan forgiveness is not taxed. This includes:

Debt forgiven through income-driven repayment forgiveness — which is automatic after 20 or 25 years of repayment, or as early as 10 years on the SAVE plan — is usually considered taxable income. But as part of the March 2021 American Rescue Plan, all forgiveness will be tax-free through the end of 2025.

If this temporary condition is not extended, all income-driven repayment forgiveness after Dec. 31, 2025, will be taxed. If this happens, you must report any canceled debt as income on your tax return.

Not all states are following suit with temporary tax-free loan forgiveness. So while you may not owe taxes on a federal level, you may still have to pay state income tax depending on where you live.

Borrowers in Indiana, Mississippi, North Carolina and Wisconsin can expect to pay state income taxes on some forgiven federal student loans, according to analysis from the Tax Foundation, a tax policy think tank based in Washington, D.C.

If your student loans are forgiven, you’ll receive a cancellation of debt form, known as Form 1099-C, to use when filing taxes. This will indicate whether the amount forgiven is considered taxable.

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Stay up to date on how student loan forgiveness and repayment may affect your finances.

You can prioritize other financial goals

With student loans in the rearview, high-income earners will have the most financial options. But the lack of a student loan payment is a welcome change to any budget.

Plan to first use the money you usually put toward student loans on essentials. After that, you can expedite life choices you may have previously delayed such as:

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