Quick answer
Most federal student loan forgiveness that occurs between January 1, 2021 and December 31, 2025 is excluded from federal taxable income because of the American Rescue Plan (ARPA). That means forgiven balances under programs such as Public Service Loan Forgiveness (PSLF) and Income‑Driven Repayment (IDR) generally will not create a federal tax bill during this period (IRS Notice 2022‑53; American Rescue Plan Act of 2021). However, state tax rules differ, private loan forgiveness typically remains taxable, and congressional or administrative changes after 2025 could alter the picture.
Why this matters
If forgiven debt is taxable, the borrower must include the forgiven amount in gross income and pay income tax on it for the year the debt is canceled. For many borrowers, that could mean a sudden, large tax bill in the year of forgiveness. The 2021 ARPA exclusion removed that federal risk for most federal loan forgiveness through 2025, which changes repayment strategy, timing, and financial planning for borrowers.
In my work advising clients on student loan strategy, I’ve seen borrowers delay refinancing or accelerate payments once they understood the exclusion, because they no longer faced a potential tax liability at forgiveness. But I’ve also seen confusion when servicers issue informational forms and borrowers are unsure how to report them. This article explains the rules, common traps, and practical steps to protect yourself.
Key rules and sources
- American Rescue Plan Act of 2021: temporarily excludes discharged student loan debt from gross income for federal tax purposes from 2021–2025. (Legislation)
- IRS Notice 2022‑53 and IRS guidance: clarifies treatment and how lenders may report canceled student loans. (IRS Publication guidance)
- Department of Education: guidance on forgiveness programs such as PSLF and IDR. (U.S. Dept. of Education)
Always verify the specific text of these sources and consult a tax professional for your facts and circumstances.
What types of forgiveness are covered
- Public Service Loan Forgiveness (PSLF): Forgiveness under PSLF that occurs during the exclusion period is generally not taxable. See the Department of Education’s PSLF guidance for program details.
- Income‑Driven Repayment (IDR) forgiveness: Balances forgiven after meeting the IDR term during the exclusion window are generally excluded from federal taxable income.
- Other federal discharges: Certain disability discharges and closed school discharges are usually covered by federal exclusion if the discharge occurs within the period.
What’s typically not covered: private student loan forgiveness and many private settlement agreements. Private creditors may report forgiven debt on Form 1099‑C and that amount is generally taxable unless another exclusion applies.
For more on program eligibility and differences, see our guide: Federal Student Loan Forgiveness Programs: Eligibility Overview.
How reporting works in practice
Lenders or servicers normally report canceled debt to the borrower and the IRS on Form 1099‑C (Cancellation of Debt). Under the ARPA exclusion, the presence of a 1099‑C does not automatically mean you owe federal tax on student loan forgiveness between 2021–2025; you may need to report the exclusion or follow the IRS guidance when filing.
Practical notes:
- Keep documentation from your servicer and the Department of Education that shows the date and reason for discharge.
- If you get a 1099‑C for a federally forgiven loan covered by ARPA, retain it but consult a tax professional before assuming it creates taxable income.
- The IRS published guidance (Notice 2022‑53) addressing issues such as reporting and how certain entities should treat forgiven student loans.
Example scenarios (numbers simplified)
- Scenario A (non‑taxable under ARPA): You have a $30,000 balance forgiven under IDR in 2023. Under the ARPA exclusion, that $30,000 is not includable in your 2023 federal taxable income.
- Scenario B (would be taxable without ARPA): If the same $30,000 were forgiven in 2026 and no law extended the exclusion, a single‑year $30,000 increase to taxable income could push you into a higher marginal bracket and create a larger federal and state tax bill.
Estimate impact: if your ordinary marginal tax rate is 22%, a $30,000 taxable discharge could create roughly $6,600 of federal tax before any state tax — a meaningful amount for most households.
State tax and other exceptions
States do not have to mirror federal tax law. Several states historically followed the federal treatment, but others treated canceled debt as taxable even when the federal government excluded it. If you live outside the federal exclusion’s applicability, you may still owe state income tax on forgiven debt. Check your state tax agency or consult a tax advisor.
Also note specific discharges for certain types of federal loans — for example, some disability discharges or closed‑school discharges have their own rules. Always review the particular program documentation.
Common mistakes and traps
- Assuming private loan forgiveness is tax‑free. Private lender cancellations usually count as taxable income unless you negotiate different terms or meet a separate exclusion.
- Ignoring reporting forms. Receiving a 1099‑C can be alarming, but don’t act without checking whether ARPA coverage or IRS guidance applies.
- Failing to track forgiveness dates. The exclusion applies to discharges occurring 2021–2025; when the discharge is effective matters for tax treatment.
For a practical checklist on reporting and planning, see our piece: Tax Implications of Student Loan Forgiveness: Reporting and Planning Tips.
Planning strategies
- Maintain records: Keep loan statements, servicer letters, and any forms showing the date and reason for discharge.
- Prepare for contingencies after 2025: If you’re close to qualifying for IDR forgiveness or PSLF after 2025, consider a conservative plan that assumes the exclusion may not be extended.
- Build a contingency reserve: If you’re concerned forgiveness might become taxable in the future, set aside a portion of monthly savings to cover a possible tax bill. Even a modest emergency cushion can prevent a surprise in tax season.
- Talk to a tax pro: A CPA or enrolled agent can help with return preparation, especially if you receive a 1099‑C or have mixed federal and private loan activity.
- Understand withholding and estimated tax: If you expect a taxable discharge (for private loans or post‑2025), you may need estimated tax payments or withholding adjustments to avoid penalties.
If you work in public service and are aiming for PSLF, our PSLF guide explains application pitfalls and documentation you should keep: Public Service Loan Forgiveness: Avoiding Common Application Pitfalls.
Frequently asked questions (brief)
- Will forgiven student loans be taxed after 2025? Possibly. The ARPA exclusion is temporary through 2025. Any change requires new legislation or administrative action; monitor IRS guidance and Congress.
- Are private loan cancellations taxable? Generally yes—private loan forgiveness is typically treated as cancellation of debt income unless another exclusion applies.
- What if I receive a 1099‑C for a forgiven federal loan? Keep the form and supporting letters, then consult a tax advisor; the form alone may not mean you owe federal tax for 2021–2025 discharges.
Practical checklist before filing taxes in a year you had forgiveness
- Confirm the discharge date and program.
- Gather servicer or DOE documentation showing the reason for discharge.
- Watch for Form 1099‑C but do not assume it creates taxable income without reviewing ARPA coverage.
- Check your state tax rules or state department of revenue guidance.
- Consult a tax professional if the amounts are large or you have a mix of federal and private loans.
Professional disclaimer
This article is educational and general in nature and does not constitute tax, legal, or financial advice. Rules can change, and individual circumstances matter. Consult a qualified tax professional, CPA, or attorney for guidance tailored to your situation.
Authoritative sources and further reading
- American Rescue Plan Act of 2021 (legislation)
- IRS Notice 2022‑53, guidance on student loan discharge reporting (IRS)
- IRS Publication 970, Tax Benefits for Education (IRS)
- U.S. Department of Education, Public Service Loan Forgiveness (ED)
These sources are the basis for federal tax treatment through 2025; check them regularly for updates.
If you want help estimating a potential tax bill if your forgiveness is later considered taxable, I can walk you through a simple scenario calculation or provide a checklist of documents to gather for your tax preparer.
