For those struggling with student debt, the idea of loan forgiveness can seem like a dream come true. Thanks to the American Rescue Plan Act of 2021, students could receive loan forgiveness without worrying about surprise tax bills – the law made all federal student loan forgiveness programs tax-free.
However, this provision is set to expire at the end of this year. Loans canceled on or after January 1, 2026 may be taxable as income.
The American Rescue Plan Act affected all forms of loan forgiveness for federal and private student loans. 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 borrowers who work for nonprofit organizations and receive 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 this tax-free forgiveness will continue through 2026 and beyond.
For borrowers struggling with student loan repayment, income-driven repayment (IDR plans) can provide relief. As of the third quarter of 2025, about 13 million people were enrolled in IDR plans, according to Federal Student Aid.
These plans base your monthly payments on a percentage of your discretionary income and the size of your family, 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 balance.
Under the terms of the various IDR plans, borrowers eligible for loan forgiveness must pay taxes on the amount forgiven. Due to the American Rescue Plan Act, borrowers whose loans were forgiven between January 1, 2021 and December 31, 2025 are exempt from paying 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 be taxed on the forgiven amount, even if your forgiveness is not actually 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. Since January 1, 2021, loans granted under this program have been exempt from income tax, and this is not expected to change. You will continue to be exempt from federal income tax on your discharged loan balance.
The American Rescue Plan Act exempted federal and private student loans discharged due to death or disability from federal income taxes. Although this provision will end this year, the One Big Beautiful Bill (OBBB) – the Trump administration’s signature bill – changed these forms of loan discharge.
Under OBBB, federal and private student loans that are forgiven due to death or disability are not taxable as income; The OBBB does not have an expiration date for these forms of release.
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 the “student loan tax bomb.” But how bad can it be? Consider this example:
Jan graduates with $40,000 in student debt after college, with an interest rate of 7.94%. She gets a job earning $40,000 a year. Assuming she is single with no dependents, she signs up for Pay As You Earn (PAYE), one of the IDR plans available. With the IDR plan, she only pays $138 per month for her loans. For example, his income never changes.
After 20 years, she has repaid a total of $19,839, but the remaining balance on her loan is $51,921. If her loans were forgiven in 2026, that amount would be added to her taxable income, pushing her into a higher tax bracket. As a result, she would have to pay $10,575 in additional taxes.
Important: The example above only takes into account federal income tax. Some states also mandate student loan forgiveness, so you may have to pay additional taxes.
The federal tax exemption for certain 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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Estimate your loan forgiveness amount: You can use the Federal Student Aid Office’s loan repayment simulator to get an idea of how much of your loan balance will be canceled. 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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Determine if you are insolvent: The IRS may waive the additional tax bill if you can prove that you are insolvent, meaning your total debt exceeds your assets. To request the insolvency exclusion, you must complete Form 982.
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Enter into 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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Put money aside: If you’re still months or years away from having your loan forgiven, setting aside a little money each month can help you build your savings so you can pay your tax bill when the time comes.
If you need help determining how loan forgiveness will impact your taxes or developing a plan to manage the tax consequences, contact a tax professional.
Not eligible for forgiveness? Student loan refinancing could help you better manage your debts.
This article was edited by Alicia Hahn.
