For those struggling with student loan debt, the idea of loan forgiveness may seem like a dream come true. Thanks to the American Rescue Plan Act of 2021, students could qualify for loan forgiveness without worrying about surprise tax bills—the law made all federal student loan forgiveness programs tax-free.
However, that provision is set to expire at the end of this year. Loans forgiven on or after January 1, 2026 may be taxed as income.
The American Rescue Plan Act affected all forms of student loan forgiveness, both federal and private. Some forms of loan forgiveness, such as Public Service Loan Forgiveness (PSLF), were already exempt from federal income taxes, but other programs were not. Here’s how the expiration of the American Rescue Plan Act will affect different programs:
Student loan borrowers who work for nonprofit organizations and have federal loans are likely eligible for PSLF. If you meet the service requirements and make 120 qualifying payments, the government will forgive your loan balance.
Loans forgiven under PSLF have never been taxable, and that tax-free forgiveness will continue through 2026 and beyond.
For borrowers struggling to pay off their student loans, income-driven repayment (IDR plans) can provide relief. In the third quarter of 2025, there were about 13 million people enrolled in IDR plans, according to Federal Student Aid.
These plans base their monthly payments on a percentage of your discretionary income and your family size, and have repayment terms of 20 or 25 years. If a borrower still has a balance at the end of the repayment term, the federal government forgives the remainder.
Under the terms of the various IDR plans, borrowers who qualify for loan forgiveness must pay taxes on the forgiven amount. Due to the American Rescue Plan Act, borrowers whose loans were forgiven between January 1, 2021 and December 31, 2025 are exempt from taxes on their forgiven loan balances.
If you are enrolled in an IDR plan and eligible for forgiveness before the end of 2025, you will also not pay taxes on the forgiven amount, even if your forgiveness is not processed until 2026. If your loans are eligible for forgiveness on or after January 1, 2026, you will owe federal taxes on the forgiven balance.
Teacher Loan Forgiveness is a federal loan program for teachers who work in low-income schools. As of January 1, 2021, loans paid off through this program were exempt from income taxes and that is not expected to change. You will continue to be exempt from federal income taxes on your canceled loan balance.
The American Rescue Plan Act exempted federal and private student loans forgiven due to death or disability from federal income tax. Although that provision will end this year, the One Big Beautiful Bill (OBBB), the Trump administration’s signature bill, modified these forms of loan forgiveness.
According to the OBBB, federal and private student loans that are discharged due to death or disability are not taxed as income; The OBBB does not have an expiration date for these registration forms.
The expiration of the student loan forgiveness provisions of the American Rescue Plan Act could have a significant impact. Because of how sudden and unexpected these taxes can be, they are known as a “student loan tax bomb.” But how bad can it be? Consider this example:
Jan graduates with $40,000 in student loan debt after graduation, with an interest rate of 7.94%. Get a job and make $40,000 a year. Assuming you are single and have no dependents, you sign up for Pay As You Earn (PAYE), one of the IDR plans available. Thanks to the IDR plan, you pay only $138 per month for your loans. For example, your income never changes.
After 20 years, you have paid a total of $19,839, but the remaining loan balance is $51,921. If her loans were forgiven in 2026, that amount would be added to her taxable income, putting her in a higher tax bracket. As a result, you would owe $10,575 in additional taxes.
Important: The example above only considers federal income tax. Some states also tax student loan forgiveness, so you may owe additional state taxes.
The federal tax exemption for some forms of loan forgiveness will expire on December 31, 2025. If you have loans that can be forgiven after that date, here’s how to prepare:
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Calculate your loan forgiveness amount: You can use the Office of Federal Student Aid’s loan repayment simulator to get an idea of how much of your loan balance will be forgiven. Then, you can use a student loan forgiveness tax bill calculator to estimate how much you would owe in additional taxes.
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Find out if you are insolvent: The IRS may waive your additional tax bill if you can prove that you are insolvent, meaning your total debt exceeds your assets. To claim exclusion due to insolvency, it is necessary to complete Form 982.
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Enter a payment plan: If you do not qualify for an exemption, you can enter into a tax payment plan. With this option, you can pay your tax bill in installments over several years. You can request a payment plan by filing Form 9465.
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Set aside cash: If loan forgiveness is still months or years away, setting aside a little cash each month can help you build savings so you can pay your tax bill when the time comes.
If you need help determining how loan forgiveness will affect your taxes or coming up with a plan to handle the tax consequences, contact a tax professional.
Not eligible for forgiveness? Student Loan Refinancing could help you better manage your debt.
This article was edited by Alicia Hahn.