Key Points
- The federal tax-free exclusion for most student-loan forgivenesst under the American Rescue Plan Act of 2021 expires on December 31, 2025.
- Starting in tax year 2026, forgiven loan amounts under many loan forgiveness programs may again be treated as taxable income.
- Some forgiveness programs remain tax-free even (for example, Public Service Loan Forgiveness and disability discharges).
When debt is cancelled or forgiven, the general rule under IRS Topic 431 is that the cancelled amount counts as taxable income (unless an exception applies). For student loans:
- If you receive forgiveness of a federal student loan (or discharge) and no exception applies, the amount may be reported on a Form 1099-C and taxed.
- However, most forgiven student loans from 2021-2025 are excluded from federal income tax.
- After December 31, 2025, the exclusion will expire, and forgiven amounts may again be taxable.
However, there are some programs that are always tax free federally. And when it comes to state taxes and student loan forgiveness, there are a whole lot of exceptions.
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Which Student Loan Forgiveness Programs Remain Tax-Free?
Some types of student loan forgiveness continue to be tax-free because of separate statutory provisions:
- PSLF (for qualifying public-service borrowers)
- Teacher-loan forgiveness for certain low-income schools
- Total and permanent disability (TPD) discharges
- Death discharges
- Borrower defense to repayment (see IRS RP-20-11)
- Some closed school discharges as part of a lawsuit
Borrowers in these programs typically will not owe federal taxes on forgiven debt even after 2025. However, state rules may vary. For example, Mississippi does tax PSLF forgiveness.
What Types Of Loan Forgiveness Programs Become Taxable Again In 2026?
The tax exemption for most student loan forgiveness under ARPA ends December 31 2025. Any forgiveness that is “completed” in 2026 may be taxable.
This is called the “student-loan tax bomb” and borrowers may be unprepared. 
These types of loan forgiveness programs will be taxable again:
- Income-driven repayment plan (time-based) loan forgiveness
- Cancellation for some closed school
- Cancellation for False Certification of the loan
- Cancellation for unpaid refund of the loan
It's important to note that the Department of Education affirmed that the effective date of cancellation (for tax purposes) is when you meet the forgiveness milestone. For example, for IBR-based forgiveness, its when you cross 240 or 300 payments. If that happens in 2025, there's no taxes, even if they don't actually process the loan forgiveness until 2026.
How To Estimate Your Tax Liability
For many borrowers, the though of paying taxes on any amount forgiven can be daunting. However, you shouldn't worry about what the tax implication will be years down the road. The best thing you can do is pick a student loan repayment plan or pursue a forgiveness path that works for your.
There's a lot of things that can happen between now and forgiveness, including changes to the law.
Furthermore, you might not even owe taxes due to insolvency. This is a complicated tax process, but we break it down here: Student Loan Forgiveness and Insolvency.
You can also run The College Investor's Student Loan Tax Bomb estimator here.
Frequently Asked Questions (FAQ)
Q: Will I get a Form 1099-C for forgiven student loans?
If forgiven debt is treated as taxable income, yes you'll receive a 1099-C. If it falls within a tax-exempt program or falls under the 2021-25 exclusion, you may not receive one.
Q: My loan is forgiven in 2024 but processed in 2026 do I still get the tax exclusion?
Check the “qualifying event date” (when you met requirements). If it was by Dec 31, 2025, your forgiveness may still qualify for the exclusion.
Q: Does state tax apply if federal tax is waived?
It depends. Some states tax forgiven federal loans even if they are excluded federally - check your state’s rules.
Q: What if my debt is large and I cannot afford the tax?
You may qualify for an exclusion of the forgiven amount if you are insolvent (liabilities exceed assets) or under bankruptcy. Discuss with a tax advisor.
Q: Are private student loan discharges treated the same?
Yes. Private loan forgiveness is usually taxable just like other types of discharged debt.
Q: Can future legislation reinstate the tax-free exclusion?
Yes - but until it passes, you should assume forgiveness after 2025 will be taxable for non-exempt programs.
Bottom Line
Student loan forgiveness has been tax-free under federal law for loans forgiven through 2025 but that is changing. For borrowers whose forgiveness will occur in 2026 or later (unless you're in tax-exempt programs) tax liability is likely.
Act now: verify your program, estimate your tax liability, save ahead, and consult a tax professional.
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Editor: Clint Proctor Reviewed by: Mark Kantrowitz
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.