Quick summary

  • Federal student loan discharges (forgiveness, cancellation, or reduction) are generally treated as cancellation of debt and historically were taxable income to the borrower.
  • The American Rescue Plan Act of 2021 (ARPA) temporarily excludes many federal student loan discharges from federal gross income for discharges made before January 1, 2026 (IRS & U.S. Department of Education). See the Department of Education’s forgiveness overview and the IRS guidance for details.

How federal tax treatment works now

  1. Historical rule: discharged debt often increased your taxable income and might generate Form 1099‑C (Cancellation of Debt) from the loan holder.
  2. Current (as of 2025): ARPA’s exclusion means most federal student loan discharges occurring before 1/1/2026 are not included in federal taxable income. That includes many program-based forgivenesses and other types of discharge — check program specifics and timing. (U.S. Department of Education: https://studentaid.gov)
  3. Reporting: you may still receive a 1099‑C or other paperwork. Keep it and follow IRS instructions for excluded discharges so you can show the income is not taxable if the exclusion applies. (IRS Topic No. 431: Cancellation of Debt)

What types of discharges are affected

  • Public Service Loan Forgiveness (PSLF) and most Income‑Driven Repayment (IDR) discharges are covered by the ARPA exclusion if the discharge date is before 1/1/2026. For program details and eligibility steps, see our guide to Public Service Loan Forgiveness and our article on Income‑Driven Repayment Forgiveness.
  • Private student loan forgiveness and many employer‑sponsored repayment assistance programs can have different tax rules; private lender discharges are generally taxable unless another exclusion applies.

Practical examples

  • Example A: If $30,000 of your federal loan is forgiven in 2024, ARPA generally excludes that $30,000 from your 2024 federal gross income — likely no federal tax on the discharged amount. Keep documentation to prove exclusion if asked.
  • Example B: If your IDR forgiveness is scheduled for 2030, ARPA’s exclusion will not apply unless Congress extends it; expect the forgiven amount could be taxable in that later year.

State tax and other pitfalls

  • State tax treatment varies: some states conform to the federal exclusion, others do not. Check your state Department of Revenue before filing state returns.
  • Timing matters: the exclusion applies based on the discharge date, not when you are notified.
  • Documentation: lenders or the Department of Education could still issue a 1099‑C. Keep copies of your discharge letter, account statements, and any IRS forms.

What to do if you expect forgiveness or a reduction

  1. Confirm the discharge date and program rules with your loan servicer or the Department of Education. (https://studentaid.gov)
  2. Save all paperwork, including servicer notices and Form 1099‑C if issued.
  3. Check whether your state taxes forgiven amounts differently and prepare state returns accordingly.
  4. Consult a tax professional at the time of discharge — in my practice I’ve seen borrowers avoid surprises by confirming exclusion eligibility and preserving documentation.

Professional tips

  • If you receive a 1099‑C but believe ARPA excludes the discharge, don’t simply ignore the form—report it correctly on your federal return and attach explanations or follow IRS instructions.
  • For large discharges, plan cash‑flow and withholding: even if forgiven debt is excluded federally, other tax or benefit interactions (e.g., income‑driven plan recalculations, public benefits) can change your situation.

Where to confirm authoritative guidance

Limitations and disclaimer

This article explains general rules as of 2025 and is educational only. Laws, IRS guidance, and state tax treatment can change. For personalized advice about your tax liability, consult a qualified tax professional or CPA.

Sources: U.S. Department of Education (studentaid.gov) and the Internal Revenue Service (irs.gov).