Some federal student loan borrowers can qualify for forgiveness through programs such as Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness (TLF), or after making years of payments under an income-driven repayment (IDR) plan.
These programs provide significant relief. As of September 2025, PSLF forgiveness eliminated $87.6 billion in combined outstanding loans for over 1.1 million borrowers.
However, student loan forgiveness isn’t always a clean break. Depending on the program and the year your loans are discharged, the canceled debt may still count as taxable income.
According to the Federal Student Aid Data Center, more than 42 million people have outstanding federal student loans. For those struggling to manage their payments, loan forgiveness can seem like a dream come true.
But student loan forgiveness could lead to a surprise tax bill — sometimes referred to as the student loan tax bomb — when borrowers submit their tax returns. The IRS considers canceled debt, including most forms of student loan forgiveness or discharge, as taxable income.
A key tax break from the American Rescue Plan Act of 2021 — exempting forgiven student loans from federal taxes — ended Dec. 31, 2025.
That means the “extra income” from your forgiven loans could push you into a higher tax bracket, potentially impacting your eligibility for other income-based credits or benefits.
However, it largely depends on how your student loans were forgiven. If your debt is wiped after 20 or 25 years because you’re enrolled in an income-driven repayment plan, you now owe taxes on that forgiven amount. However, loans forgiven through several other programs, including PSLF and the Teacher Loan Forgiveness program, remain tax-free.
You may owe state taxes on your discharged loans, too. Even when the federal government waived taxes on student loan forgiveness from 2021 to 2025, some states still taxed it — and now that the exemption has ended, more may follow suit.
After Jan. 1, 2026, how student loan forgiveness and discharge programs are taxed depends on the program:
Federal loan borrowers who work for nonprofit organizations, government agencies, or public service groups may qualify for PSLF. They must work for a qualifying employer full-time for 10 years and make 120 qualifying monthly payments. After reaching those milestones, the government eliminates the remainder of their federal loan balance.
PSLF is one of the few programs that is excluded from federal income taxes; none of the forgiven loan amount is taxable as income.
Under the TLF program, teachers employed full-time at a qualifying school for at least five consecutive academic years can qualify for up to $17,500 in loan forgiveness for federal Direct Subsidized and Unsubsidized Loans.
Teacher Loan Forgiveness isn’t treated as taxable income by the IRS, so you don’t owe federal taxes on the forgiven amount — and that rule isn’t impacted by the expiration of the American Rescue Plan, either.
IDR plans are for federal loan borrowers who have trouble affording their student loan payments under the standard 10-year repayment plan. These plans tie your monthly bill to a share of your discretionary income and stretch out the repayment timeline.
As of 2026, here’s what’s available:
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Income-Based Repayment (IBR): The main remaining “legacy” income-based option.
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Repayment Assistance Plan (RAP): The new default IDR plan, replacing SAVE, PAYE, and ICR. It will be available beginning July 1, 2026.
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PAYE and ICR (phasing out): Borrowers can still enroll in these plans for now, but they will be sunsetted by July 1, 2028. At that time, existing borrowers will have to switch to a new plan.
If the borrower still has a balance at the end of their loan term — which can be 20 or 25 years, depending on the plan — the government will discharge the remainder. However, the forgiven loans are taxable as income at the federal and state levels.
Related: Student loans will look different in 2026. Here’s what’s changing.
Borrower Defense to Repayment Discharge is a program that eliminates federal student loans for borrowers who were misled by their colleges or if their schools engaged in misconduct and violated state laws.
The IRS and the U.S. Department of the Treasury issued notices clarifying that loans discharged through borrower defense to repayment are not taxable as income.
Total and Permanent Disability Discharge (TPDD)
TPDD applies to borrowers who become totally and permanently disabled. The government will discharge the remaining loan balance for eligible federal loan borrowers.
Depending on where you live, the amount discharged may be taxable at the state level. For federal taxes, whether the discharged balance is taxable depends on when you qualified for TPDD:
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Discharged before Jan. 1, 2018: The forgiven amount was generally taxable.
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Discharged on or after Jan. 1, 2018: Under the Tax Cuts and Jobs Act and the OBBB Act of 2025, TPD discharges are permanently exempt from federal income tax. You don’t need to report the discharged balance as income on your federal return.
Private student loans aren’t eligible for federal loan programs like PSLF or TPDD. But many lenders offer their own discharge options for death or total and permanent disability.
The broad tax break from the American Rescue Plan ended on Dec. 31, 2025. However, the OBBB Act of 2025 permanently preserved federal tax-free treatment for private and federal loans discharged due to death or total and permanent disability.
So, if a private lender wipes out your debt because of permanent disability in 2026 or later, you won’t owe federal income tax on the forgiven amount. But other types of private loan settlements or “hardship” cancellations are still treated as taxable income.
State taxes can also apply, depending on your location.
Even if your student loan forgiveness is now subject to federal income tax, you may be able to lower or avoid the tax by using the IRS insolvency exclusion. This applies if your total debts were greater than your total assets at the time your loan was forgiven.
To claim it, you must file IRS Form 982, which lets the IRS cancel the tax bill if you can prove that paying it would cause serious financial hardship. However, the insolvency exclusion isn’t a get-out-of-jail-free card, notes Craig Toberman, a CPA and certified financial planner at Toberman Becker Wealth.
“You can only exclude cancellation income up to the amount liabilities exceed assets immediately before forgiveness,” says Toberman. “And it typically requires solid documentation.”
Toberman says that in practice, the insolvency exclusion only really helps when someone’s net worth is truly underwater — in other words, you owe more than you own.
Timing also matters. If you became eligible for forgiveness in 2025 but your paperwork wasn’t finalized until 2026, the Department of Education has said you may still qualify for tax-free treatment.
Ultimately, if you can’t wiggle out of paying taxes on your forgiven debt, plan ahead. The canceled balance counts as “extra income,” which can push you into a higher tax bracket. So, look for ways to lower your taxable income, such as contributing to a traditional IRA.
Read more: What is taxable income, and how can you reduce it?
If your forgiven student loan debt is taxable, your loan servicer or lender will send you IRS Form 1099-C (Cancellation of Debt). This form shows how much debt was forgiven and must be reported as income on your federal tax return. If your forgiveness is tax-free — like PSLF or Teacher Loan Forgiveness — you typically won’t receive a 1099-C, but it’s smart to keep your discharge notice for your records anyway.
Technically, you can pay down your loan balance to decrease your tax bill if you’re expecting a loan discharge after 2025. But because those taxable programs are based on your income, if you pay down the debt, there’s a chance your payments will go up in the future, decreasing the effectiveness of the forgiveness program.
How much you will have to pay in taxes depends on the amount of loan forgiveness you receive and your tax bracket. You can review the current income tax rates and brackets on the IRS website. If you are expecting a large tax bill, setting aside a little cash every month in a high-yield savings account or CD can help you prepare.
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