Quick answer
Whether discharged student loan debt is taxable depends on the type of loan, the reason for discharge, and timing. Federal discharges tied to public service, disability, closed schools, or borrower-defense claims are generally excluded from federal taxable income through December 31, 2025, because of the American Rescue Plan Act of 2021 (ARPA). Private loan cancellations or settlements, and some other situations, can still produce taxable income reported on Form 1099‑C (Cancellation of Debt).
Sources: U.S. Department of Education (StudentAid) and IRS guidance (see links below).
How this affects borrowers (overview)
In everyday terms:
- If a qualifying federal student loan discharge occurs on or before December 31, 2025, it is generally excluded from federal taxable income under ARPA (American Rescue Plan Act of 2021). (U.S. Dept. of Education: https://studentaid.gov/; IRS: https://www.irs.gov/)
- If a private lender forgives or settles a student loan, that forgiven amount is typically considered taxable cancellation of debt unless another exclusion applies.
- Even when federal tax treatment excludes discharge, state tax rules can vary — some states may still tax the forgiven amount.
I’ve worked with clients who relieved large balances through Public Service Loan Forgiveness (PSLF) and disability discharges and — thanks to recent law — didn’t face federal tax bills on those discharges. Still, the paperwork and timing matter, and errors (for example, receiving a Form 1099‑C when you shouldn’t) are common enough that borrowers should verify everything.
Typical scenarios and tax outcomes
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Public Service Loan Forgiveness (PSLF): Forgiveness through PSLF is not treated as taxable income at the federal level for discharges occurring through Dec. 31, 2025 because of ARPA. Confirm with your loan servicer and keep all documentation. (Dept. of Education)
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Total and Permanent Disability (TPD) discharge: Generally excluded from federal income through Dec. 31, 2025 under ARPA. (Dept. of Education)
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Closed-school or borrower-defense discharges: Typically non-taxable through the ARPA exclusion when the discharge date falls within the covered period, though timing and documentation are key. (Dept. of Education / IRS)
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Private loan forgiveness, settlement, or creditor write-off: Usually taxable as cancellation of debt and reported on Form 1099‑C unless you qualify for an exclusion (for example, bankruptcy, insolvency — Form 982 may apply). Verify state tax treatment, which can differ from federal rules.
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Bankruptcy: Student loans discharged through bankruptcy are rare and treated differently; if discharged, review bankruptcy orders and consult a tax professional about tax consequences.
Forms and reporting you may see
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Form 1099‑C (Cancellation of Debt): Lenders commonly use this to report canceled debt of $600 or more. If you receive a 1099‑C, it doesn’t automatically mean the debt is taxable — but it does mean you must investigate and keep the form.
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Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness): Used to report exceptions such as insolvency or bankruptcy exclusions. Note: ARPA’s temporary exclusion for certain student loan discharges is a legislative exclusion; the IRS and Dept. of Education have guidance explaining how excluded discharges should be handled. If you receive a 1099‑C in error for an ARPA-excluded discharge, contact your servicer and consult the IRS guidance. (IRS: https://www.irs.gov/)
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Amended returns: If you reported discharged debt as income in an earlier year and the debt later becomes excluded (for example, ARPA exclusion applied retroactively), you may need to file Form 1040‑X to amend that return and claim a refund. Keep documentation and get professional help where necessary.
Practical steps to protect yourself (checklist)
- Confirm the discharge type and date. Ask your servicer for written confirmation showing the reason for discharge (PSLF, TPD, borrower-defense, closed school, settlement, etc.).
- Watch for Form 1099‑C. If you get one but your discharge is ARPA-excluded, ask the servicer to correct it and provide a corrected form.
- Keep all documentation. Save discharge letters, servicer emails, and any correspondence with the Department of Education.
- Check state tax rules. Use your state revenue department website or a tax advisor to confirm whether your state conforms to the federal exclusion.
- If you already filed taxes that include discharged debt as income, consult a tax pro about amending returns (Form 1040‑X) and claiming a refund.
- When in doubt, hire a tax professional. Complex cases (private settlements, insolvency, bankruptcy) typically need personalized tax advice.
Examples to illustrate
Example A — Public Service Loan Forgiveness
A public school teacher completes the required 120 qualifying payments and receives PSLF with $50,000 discharged in 2024. Under ARPA, that discharge is excluded from federal taxable income, so she will not report the $50,000 as taxable income on her 2024 return.
Example B — Private loan settlement
A borrower settles a private student loan for $15,000 (original balance $40,000). The lender issues a Form 1099‑C reporting $25,000 of canceled debt. Because this is a private loan settlement, the canceled amount is typically taxable unless the borrower can show insolvency or another exclusion applies.
Example C — 1099‑C issued in error
A borrower receives a 1099‑C for a federal discharge that is excluded under ARPA. The borrower should contact the servicer, request correction, and, if needed, contact the IRS for guidance about how to proceed. If the borrower already filed taxes reporting the discharge as income, they may need to file Form 1040‑X.
State taxes and other caveats
State tax rules vary. Some states automatically conform to the federal definition of gross income and the ARPA exclusion; others do not. For example, certain states may still count forgiven student loan amounts as taxable income unless state law has been amended. Check your state revenue department or a tax professional for specifics.
Also remember: ARPA’s exclusion is a temporary federal rule that applies to discharges through Dec. 31, 2025. If you expect a discharge after that date, stay current on federal legislative changes.
Related FinHelp.io resources
- Learn when loans are eliminated and common discharge types: Student Loan Discharge: When Debt Can Be Eliminated
- If your employer helps with payments, understand extra tax issues: Employer Student Loan Repayment: How It Works and Tax Considerations
- For related tax breaks while repaying, see: How Student Loan Interest Deduction Works
Common mistakes I see (from practice)
- Assuming all discharged debt is tax-free. Many borrowers assume forgiveness equals no tax; this is only true for qualifying federal discharges covered by ARPA during the specified period.
- Ignoring a 1099‑C. Filing without addressing an incorrect 1099‑C can trigger IRS notices.
- Failing to check state rules. Borrowers often get surprised by a state tax bill after a federal exclusion.
Final notes and professional disclaimer
Federal law changed in 2021 to exclude many student loan discharges from taxable income through Dec. 31, 2025 (American Rescue Plan Act). Always confirm the discharge type, keep complete documentation, and consult a tax professional for personalized advice. This article is educational and does not replace individualized tax or legal counsel.
Authoritative sources: IRS (https://www.irs.gov/), U.S. Dept. of Education / Federal Student Aid (https://studentaid.gov/), Consumer Financial Protection Bureau (https://www.consumerfinance.gov/).
(Disclosures: In my 15+ years advising borrowers, I’ve helped clients validate discharge paperwork, correct wrongful 1099‑Cs, and amend tax returns to claim refunds when the law changed.)
