Key Points
- A new House tax proposal extends tax-free student loan forgiveness, but only for death or total and permanent disability discharge.
- Other types of loan forgiveness, including those tied to income-driven repayment plans, are not covered.
- The extension would take effect for discharges after December 31, 2025, keeping a narrow exemption alive beyond its current expiration date.
The House Ways and Means Committee has proposed a narrow extension of a tax exemption for student loan forgiveness as part of its 2025 budget reconciliation bill (PDF File). While the proposal would allow borrowers who have their loans discharged due to death or total and permanent disability to continue avoiding tax bills on the forgiven amount, it does not include forgiveness tied to repayment plans.
This provision, found in Section1100019 of the draft bill, amends the Internal Revenue Code to maintain the tax exclusion for certain types of discharges. The current law about student loan forgiveness, enacted under President Trump's first administration with the the Tax Cuts and Jobs Act in 2017, exempted death and disability discharge.
Subsequent legislation under the American Rescue Plan Act, signed by President Biden, exempted all types of student loan forgiveness until December 31, 2025.
Without action, all forgiven amounts, including for death or disability, would become taxable in 2026. However, this proposed plan continues to allow just death and disability discharge to continue tax-free. Note: Public Service Loan Forgiveness is always tax-free federally.
It's important to remember that taxes and student loan forgiveness is a messy subject. Beyond the federal rules, each state has their own rules regarding state taxes and loan forgiveness. Some states follow federal law, some do not.
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Who Would Still Receive Tax-Free Student Loan Forgiveness Under The Proposed Bill?
The proposed language specifically retains tax relief for student loan forgiveness related to:
- Loans forgiven due to death of the borrower or student
- Loans discharged due to total and permanent disability
These include discharges under Sections 437(a) and (d) of the Higher Education Act, Section 464(c)(1)(F), or similar provisions for private education loans. It applies to both federal and private student loans.
The provision would apply to loan discharges occurring after December 31, 2025.
What's Left Out Of The Proposal
Notably absent from the bill is any extension of tax-free forgiveness for other common types of student loan discharge. This includes:
- Income-Driven Repayment plan forgiveness under IBR, PAYE, or ICR
- Closed school discharges
- Borrower defense to repayment claims
Unless Congress acts to expand the exemption, these discharges will again be treated as taxable income starting in 2026. That would mean borrowers could face significant tax bills after receiving loan forgiveness through long-term repayment plans or government programs targeting fraud or school closures.
What Happens Next
The proposed tax bill remains a draft and will likely face several rounds of revisions and changes before advancing to the House floor. Democrats have previously called for a permanent exemption for all student loan forgiveness, while Republicans have focused on limiting what they view as costly or expansive debt cancellation efforts.
Either way, borrowers need to be concerned about a future student loan tax bomb.
With student loan payments resumed after a multi-year pause and court cases ongoing over federal forgiveness plans, borrowers will be watching closely to see whether broader protections are restored or left to expire.
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Editor: Colin Graves
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.