Do You Have to Pay Taxes on Student Loan Forgiveness Now?

The laws governing student loan repayment and loan forgiveness seem to be constantly changing.And that’s particularly true for how tax laws treat loan discharges.Historically, student loan forgiveness has been a taxable event.The amount of the discharge or cancellation is reported to the IRS via a Form 1099-C, a tax form reflecting the amount of student loan discharge or cancellation that a borrower received.

The borrower must then report the amount from the Form 1099-C on their tax return, where it is treated as “income” for tax purposes.Borrowers may then have to pay income taxes (both federally and, if applicable, at the state level as well) as if they had “earned” the amount of discharged student loans as “income” for that tax year.That can lead to significant, and sometimes unaffordable, tax liability.But the tax treatment of student loan forgiveness and discharges can vary from program to program.

And even when looking at a single program, the tax laws have changed over time, leading to different tax treatments depending on when, specifically, the discharge happened.  Here’s where things stand with taxation on student loan forgiveness, and what borrowers need to know.Taxation on student loan forgiveness under IDR plans Income-driven repayment (IDR) plans, such as Income-Based Repayment (IBR) and Pay As You Earn (PAYE), allow borrowers to make affordable payments tied to a formula applied to their income (usually their Adjusted Gross Income from their federal tax return) and family size.  Borrowers who enroll in IDR plans can qualify for student loan forgiveness, typically after being in repayment under these plans for at least 20 or 25 years.But the tax treatment of IDR loan forgiveness has changed several times.American Rescue Plan Act made IDR forgiveness tax-free IDR loan forgiveness was, up until fairly recently, a taxable event resulting in the issuance of a Form 1099-C.

Then, in 2021, a Democratic Congress under President Biden passed the American Rescue Plan Act, which exempted most forms of federal student loan cancellation (including IDR student loan forgiveness) from federal taxation.But because the legislation was passed through the budget reconciliation process, which allows legislators to bypass a Senate filibuster but limits the ability of Congress to enact permanent financial changes that could increase the deficit, the tax relief expired at the end of 2025.  Why IDR forgiveness became taxable again in 2026 The current Republican Congress under President Trump declined to extend the expiring tax relief as it applies to IDR student loan forgiveness.As a result, starting on January 1, 2026, IDR loan forgiveness went back to being treated as taxable income again.  “Debt discharged under an IDR plan could create a federal tax liability for you, depending on the effective date of the discharge,” says the Education Department in online guidance that was updated in March 2026.“The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt.

Specifically, the law excludes from gross income qualifying student loan amounts that are discharged on or after Jan.1, 2021, and before Jan.1, 2026.” Advocacy groups have warned that the failure to extend the student loan tax relief provisions of the American Rescue Plan Act could result in massive tax liability for borrowers who receive student loan forgiveness under IDR plans this year and beyond.“Millions of borrowers who are currently on track to earn debt relief under an IDR plan after January 1, 2026, will see a massive increase in their federal income tax liability and therefore have to pay thousands of dollars in additional taxes,” warned Protect Borrowers in an analysis published in November 2025.  Narrow exception for taxation on IDR student loan forgiveness There is, however, one small but important exception for borrowers who receive student loan forgiveness through IDR plans after the expiration of the American Rescue Act provisions.  Under an interim agreement reached between the Education Department and the American Federation of Teachers in fall 2025 to resolve an ongoing legal challenge over alleged problems in the administering of IDR programs, the department agreed that most borrowers who reached their IDR discharge eligibility threshold during 2025 (when the American Rescue Plan Act was in place), but didn’t actually receive student loan forgiveness until this year (after the tax relief provisions expired) due to system issues and processing delays, should not be issued a Form 1099-C and, therefore, should not have to face federal taxation.

“If a borrower meets their IDR repayment milestone before Jan.1, 2026, but their loans are discharged on or after Jan.1, 2026, then that discharge is not subject to federal tax,” said the Education Department in its online guidance.Death and disability discharges are permanently tax-free While congressional Republicans allowed most of the temporary tax relief provisions associated with student loan forgiveness to expire, they did enact permanent tax relief for the Total and Permanent Disability (TPD) discharge program and the death discharge, which had also been set to expire at the end of 2025.

TPD Discharge allows borrowers to wipe out their federal student loans if they have a lasting medical impairment that prevents them from engaging in substantial, gainful activity.  TPD and death discharges were taxable events until 2017, when congressional Republicans under the first Trump administration made them tax-free through 2025 under the 2017 Tax Cuts and Jobs Act.Last year, Congress and President Trump made that tax relief permanent.However, TPD Discharges and other forms of student loan forgiveness could be taxable at the state level, even if it’s not taxable federally.“The amount of your loan that’s discharged due to TPD Discharge may be considered income for state tax purposes,” says the Education Department on its TPD Discharge website.

“Consult with your state tax office or a tax professional before you file your state tax return.” Other types of student loan discharges that aren't taxable While the tax treatment of IDR student loan forgiveness and TPD Discharges has been a bit complicated during the last several years, the tax treatment of other student loan discharge programs has been more consistent.Public Service Loan Forgiveness (PSLF) has long been tax-free federally, as have several school-related discharge programs, including Closed School discharges, False Certification discharges and Borrower Defense to Repayment.  “Debt cancelled under Public Service Loan Forgiveness (PSLF) was already exempt from federal income tax, as is debt cancelled under certain school related discharge programs, specifically Closed School Discharge, False Certification, and Unpaid Refund Discharges,” noted Protect Borrowers in its analysis.States may still tax forgiveness that's federally tax-free But borrowers should be aware that while many states will mirror the federal tax treatment of student loan forgiveness, not all states will.A handful of states will tax student loan discharges, even for programs that have long been tax-free at the federal level, like PSLF.

Borrowers who are on track for a discharge of their student loans should consult with a qualified tax advisor to make sure they understand the possible tax consequences.A surprise tax bill on forgiven loans can cost tens of thousands.A one-on-one consult with a Student Loan Planner expert can help you run the numbers and plan for what you'll actually owe.