Your Student Loan Forgiveness May Soon Be Taxable. Here’s What To Know

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Student loan forgiveness under income-driven repayment plans will once again be considered taxable income starting on Jan. 1, 2026.

When your student loan debt is canceled through a loan forgiveness or loan discharge program, you may be taxed on the amount forgiven. The IRS treats loan cancellation as though someone gave you money to pay off the debt. You will receive an IRS Form 1099-C from the lender for the amount that was forgiven or discharged, if the amount is $600 or more.

You must report the amount of debt that was canceled on line 8c of Schedule 1 of IRS Form 1040, even if you didn’t receive a 1099-C.

Some types of student loan forgiveness and discharge are tax-free and some are not.

Some types of cancellation will be taxable starting in 2026

All student loan debt cancellation was tax-free from 2021 to 2025 under the American Rescue Plan Act (ARPA), but this exclusion from income has not been extended past its expiration of Dec. 31, 2025.

Cancellation of remaining debt after 20, 25 or 30 years’ worth of payments in an income-driven repayment plan will be taxable if the cancellation occurs in 2026 or a later year. The student loan debt canceled at the end of an income-driven repayment plan will be treated as though it were income to the borrower.

This includes forgiveness under the Income-Based Repayment plan (IBR) and the new repayment assistant plan (RAP). (Due to a decision of the 8th Circuit Court of Appeals, student loan forgiveness is no longer available nationwide under the Income-Contingent Repayment, Pay-As-You Earn, REPAYE and SAVE plans, although payments made under these plans can count toward forgiveness under IBR and RAP.)

All other student loan forgiveness programs remain tax-free under other existing laws.

Current student loan news

Federal student loan programs are in flux. Stay up to date with trends that will impact your student loans – and your wallet.

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Is your forgiveness taxable?

This chart shows the tax treatment of different types of student loan forgiveness and discharge.

However, note that states may tax student loan forgiveness even if the forgiveness is excluded from income on federal income tax returns. For example, Arkansas, Indiana, Mississippi, North Carolina and Wisconsin tax Public Service Loan Forgiveness. These states do not conform to the federal definition of adjusted gross income or taxable income, yielding a different tax treatment of student loan forgiveness. Some of these states conform with the federal definition as of a specific date and others do not base income on federal tax definitions.

There may also be differences in state treatment of student loan forgiveness at the end of an income-driven repayment plan, closed school discharge and borrower defense to repayment.

The cost of taxing student loan forgiveness

Borrowers whose student loan debt is ultimately canceled after decades in an income-driven repayment plan may face a large tax bill.

Even though the tax bill is less than the amount forgiven, it may nevertheless be unaffordable for the borrower.

Perversely, the tax burden may be worst for the borrowers who can least afford it. In an IBR, the monthly payment is $0 if the borrower’s adjusted gross income (AGI) is less than 150 percent of the poverty line. So, the full amount of interest accrues and is added to the loan balance each month.

With a 5 percent interest rate, the loan balance may balloon to 225 percent of the original loan after 25 years. In a 12 percent tax bracket, that results in a tax bill that is 27 percent of the original debt.

No, the era of student loan forgiveness isn’t over. Here’s why

This client of The Institute of Student Loan Advisors (TISLA) is among those likely to struggle with the tax bill after forgiveness. “She’s been on old IBR with a $0 payment because she’s essentially been surviving off of Social Security for the past 25 to 30 years,” said TISLA founder Betsy Mayotte at the mid-May Higher Education Finance Symposium in Alexandria, Va. “And if her loan is forgiven by the end of this year, which she’s eligible for — she’s made enough payments — she’s going to have a tax bill of six figures. And she’s going to have to file for insolvency. So, that’s my real concern when it comes to forgiveness.”

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Bottom line

You should take the following steps to determine if you are affected by these changes.

• Track what type of student loan forgiveness you are receiving.

• Watch for an IRS Form 1099-C from your lender.

• Understand whether this forgiveness is taxable under federal rules.

• Check state income tax forms and instructions to see if this forgiveness is taxable under state law.

• Consider consulting a tax professional if you expect forgiveness after 2025.