Background

Loan forgiveness programs—student loan forgiveness, employer-based assistance, PPP forgiveness, and private lender settlements—relieve debt but can create tax consequences. Some types of forgiven debt are treated as taxable “cancellation of debt” (COD) by the IRS and may generate a Form 1099‑C. However, exceptions and temporary exclusions can apply; for example, the American Rescue Plan Act excluded most federal student loan forgiveness from taxable income through December 31, 2025 (see IRS and CFPB guidance). Always verify current law and IRS notices for updates (IRS.gov; ConsumerFinancialProtection.gov).

How tax consequences typically work

  • Taxable COD: When a lender cancels a debt, the forgiven amount can be treated as ordinary income unless an exclusion applies (IRS — cancellation of debt rules). Lenders often report this on Form 1099‑C.
  • Common exclusions: insolvency (liabilities > assets at discharge), bankruptcy discharge, qualified exclusions such as specific statutory relief for certain student loans through 2025, and program-specific rules (check program guidance).
  • State tax differences: states may not follow federal exclusions; you may owe state tax even if federal tax is excluded.

Practical planning steps (actionable checklist)

  1. Confirm the type of forgiveness and read program rules
  • Identify whether your forgiveness is federal student loan discharge, PSLF, income‑driven plan forgiveness, PPP/business loan forgiveness, private lender settlement, or employer‑paid assistance. Program rules determine tax treatment—compare guidance from the program administrator and the IRS.
  • Related: see our guide on [How tax consequences work after loan forgiveness](