Student Loan Forgiveness and Taxes: What May Be Taxable

Quick overview

Student loan forgiveness cancels all or part of your remaining student debt so you no longer must repay it. Whether that canceled amount is treated as taxable income depends on federal tax law in effect for the year of discharge, the type of program that granted the forgiveness, and your state tax rules. The American Rescue Plan Act of 2021 (ARPA) temporarily excluded discharged student loan debt from gross income through tax year 2025, but borrowers and planners should prepare for the exclusion to expire unless Congress acts. (See IRS guidance on cancellation of debt and ARPA.)

What the law says now (through tax year 2025)

• The American Rescue Plan Act of 2021 excludes discharged student loan debt from gross income for federal tax purposes for amounts discharged in tax years 2021 through 2025. This means most borrowers who receive forgiveness during these years generally should not report the forgiven amount as taxable income on federal returns. (U.S. Department of the Treasury and IRS guidance.)
• Lenders or servicers may still send Form 1099-C (Cancellation of Debt) in some situations. If you receive a 1099-C for a student loan discharge in 2021–2025, follow the IRS instructions and the ARPA exclusion when preparing your return; do not assume a 1099-C automatically makes the amount taxable. See IRS resources on 1099-C reporting.
• The exclusion is a federal rule only; state tax treatment varies by state. Some states follow the federal exclusion, others do not, and a few may tax forgiven student debt even while the federal government excludes it. Confirm state guidance or consult a tax pro.

Sources: U.S. Department of Education (studentaid.gov), IRS (irs.gov), Consumer Financial Protection Bureau (consumerfinance.gov).

What may be taxable after 2025

ARPA’s exclusion expires after tax year 2025 unless extended by Congress. If Congress does not act, forgiven student loan amounts discharged in 2026 and later will generally be treated under the IRS rules for cancellation of debt: most discharged debt is included in gross income and taxed as ordinary income, unless an existing exception or exclusion applies.

Common exceptions that can keep discharged debt from taxable income (independent of ARPA) include:

• Discharges that qualify under bankruptcy rules (rare and fact-specific).
• Loan principal discharged as part of insolvency determinations in some cases.
• Certain qualified disaster-related discharges or specific statutory exclusions.

Because program details matter, the tax treatment of specific forgiveness programs can vary. For current program guidance consult the U.S. Department of Education site for PSLF and program rules, and IRS guidance on canceled debt.

How different forgiveness programs are typically treated

• Public Service Loan Forgiveness (PSLF): Under ARPA through 2025 the forgiven amount is excluded from federal income. If the ARPA exclusion is not extended, forgiveness received later could be taxable unless another exclusion applies. Details and qualifying rules are at the Department of Education’s PSLF page. Also see FinHelp’s guide: Tax Implications of Loan Forgiveness and Discharge.
• Income-Driven Repayment (IDR) forgiveness: Under ARPA your IDR forgiveness is excluded from gross income through 2025; future tax treatment will depend on whether the exclusion is extended. If you’re planning long-term, consider how IDR timelines (20–25 years) interact with tax law changes. See our article on How Income-Driven Repayment Can Lead to Student Loan Forgiveness.
• Teacher Loan Forgiveness: Historically up to $17,500 of forgiveness under the Teacher Loan Forgiveness program had different tax treatment in some states — always check program rules and tax law for the year of discharge.
• Closed-school discharge, total and permanent disability (TPD) discharges, and other administrative discharges: ARPA’s exclusion also applies through 2025, but verify program-specific guidance and documentation requirements.

Internal resources: “Tax Implications of Loan Forgiveness and Discharge” and “Income-Driven Repayment Plans” on FinHelp.io.

What to expect at tax time (forms and reporting)

• Form 1099-C (Cancellation of Debt): Creditors typically issue a 1099-C when they cancel $600 or more in debt. If you receive a 1099-C for discharged student loan debt in 2021–2025, the ARPA exclusion may still apply and you may not have to include the amount as income — but you must keep documentation showing the discharge and follow IRS instructions.
• Keep loan servicer notices: Save official forgiveness letters, loan account statements showing $0 balance, servicer correspondence, and any certification from your employer (for PSLF) or servicer. These documents are essential if the IRS questions the tax treatment or if a 1099-C is generated in error.
• Tax forms and future rules: If forgiven debt becomes taxable in a later year, it will be reported as ordinary income and taxed at your applicable marginal rate; you cannot retroactively change the tax status of forgiveness years already covered by ARPA.

Example scenarios (simple math)

1) Immediate (ARPA-covered) forgiveness — tax-free through 2025:

• Forgiven amount: $45,000
• Federal tax due: $0 (assuming ARPA exclusion applies for that tax year)
• State tax: Depends on state law; could be taxable in some states.

2) Forgiveness treated as taxable (post-2025, hypothetically):

• Forgiven amount: $45,000
• Taxpayer’s marginal federal rate: 22%
• Additional federal tax: 0.22 × $45,000 = $9,900
• State tax (example at 5%): 0.05 × $45,000 = $2,250
• Total potential tax: $12,150

This example shows how a seemingly large tax bill can accompany forgiveness if the exclusion isn’t in place. In practice, exact liability will vary by filing status, deductions, credits, and whether the forgiven amount catapults you into a higher bracket.

Practical planning steps

1. Track the timing of your forgiveness. If forgiveness is likely to occur in 2026 or later, plan for the possibility of taxability. If it’s likely to occur by 2025, confirm the discharge year and keep documentation showing the date of discharge.
2. Build a reserve. If your plan might produce taxable forgiveness, consider saving a percentage of the expected forgiven balance. A conservative range to set aside is 20–30% of the forgiven amount (adjust to your expected tax bracket and state taxes).
3. Consult a tax pro or CPA. This is especially important for complex situations (consolidations, multiple loan types, employer contributions, or mixed state residency during repayment and discharge).
4. Watch for 1099-C and respond promptly. If you receive a 1099-C but believe the ARPA exclusion applies, attach an explanation to your return or work with a preparer — and retain servicer documentation.
5. Consider alternatives. In some cases, adjusting repayment strategy (switching repayment plans or consolidating) can change the timing of forgiveness or the amount discharged. Each choice has tax and financial tradeoffs.

State tax rules matter

State tax treatment of discharged student loan debt varies. Some states automatically conform to federal tax code changes, which means they adopted ARPA’s exclusion; others require legislative change and may still tax forgiven debt. Check your state revenue department’s guidance or ask a CPA licensed in your state.

Common misconceptions

• “Forgiven means tax-free”: Not always. The federal exclusion applies only through the ARPA window unless extended. Even during that window, state taxes may still apply.
• “A 1099-C means I owe tax”: A 1099-C is an informational return; it doesn’t automatically make the amount taxable if a valid exclusion applies. Keep documentation.
• “Private loan forgiveness is automatically tax-free”: Private loan discharges follow the same IRS cancellation-of-debt rules. ARPA’s exclusion generally covered discharges 2021–2025 broadly, but verify private servicer practices and reporting.

Useful resources and next steps

Official guidance:

• IRS — Cancellation of Debt (including Form 1099-C information): https://www.irs.gov/ (search “cancellation of debt” or “Form 1099-C”)
• U.S. Department of Education — PSLF and forgiveness program details: https://studentaid.gov/
• Consumer Financial Protection Bureau — Understanding student loan forgiveness: https://www.consumerfinance.gov/

FinHelp internal resources:

• Tax Implications of Loan Forgiveness and Discharge: https://finhelp.io/glossary/tax-implications-of-loan-forgiveness-and-discharge/
• Income-Driven Repayment Plans: https://finhelp.io/glossary/income-driven-repayment-plans/
• Teacher Loan Forgiveness vs Public Service Loan Forgiveness: Differences: https://finhelp.io/glossary/teacher-loan-forgiveness-vs-public-service-loan-forgiveness-differences/

Final takeaways

• For discharges between 2021 and 2025, ARPA generally keeps forgiven student loan amounts off your federal tax return. Keep documentation and check your state rules.
• If ARPA is not extended, forgiven balances discharged in 2026 and after could be taxable as ordinary income. Plan now: monitor legislation, keep good records, consult a tax professional, and consider saving for a potential tax bill.

Professional disclaimer: This article is educational and not personalized tax advice. Tax law changes periodically; consult a tax professional or CPA for advice tailored to your situation.