Student Loan Forgiveness Is Taxable Again in 2026
For five years, forgiven federal student loan balances were excluded from federal taxable income. That exclusion expired on 31 December 2025 and was not renewed. If your balance is forgiven in 2026 or later under an income-driven plan, the forgiven amount is ordinary income in the year it is discharged.
What changed, precisely
The American Rescue Plan Act of 2021 created a temporary exclusion covering tax years 2021 through 2025. It was always scheduled to lapse. Many borrowers understandably took it for the permanent rule, because it was in force for the entire period during which most people learned how forgiveness worked.
Separately, P.L. 119-21 rewrote the relevant part of the tax code into a narrower, permanent exclusion covering discharges due to death and total and permanent disability, effective for discharges after 31 December 2025. So there was no gap for those categories — but the broad exclusion covering everything else is gone.
PSLF is still tax-free
This is worth stating plainly, because the opposite claim is circulating. Public Service Loan Forgiveness has its own permanent exclusion under a different provision of the tax code, one that covers discharges conditioned on working for a period in certain professions or for certain employers. It was never dependent on the 2021 provision, so its expiry changed nothing for PSLF.
If you read that PSLF is now taxable, that is an overcorrection, not a change in the law.
What this costs
Forgiven balances are added on top of your ordinary income for that year, which can push part of the amount into higher brackets. Many states tax it as well.
The effect is largest for exactly the borrowers the plans were meant to help. Someone whose payments never covered accruing interest can reach forgiveness owing more than they originally borrowed, and the tax is assessed on the whole discharged balance.
Two things that reduce the bill
Insolvency. If your total liabilities exceed the fair market value of your total assets immediately before the discharge, you can exclude the cancelled debt up to the amount by which you are insolvent, reported on IRS Form 982. Because student debt itself counts as a liability in that test, borrowers reaching forgiveness with large balances are often insolvent on paper even with meaningful savings. It also requires reducing certain other tax attributes, so it is not free.
Planning ahead. The liability lands in a single known year. Borrowers approaching forgiveness have time to set money aside, manage which year income falls in, and take advice before the discharge rather than after the Form 1099-C arrives.
How this affects plan choice
The tax changes the arithmetic of comparing plans. A plan with lower monthly payments but a larger balance at forgiveness may cost more once the tax is included. RAP's 30-year term is longer than IBR's 20 or 25, but its interest waiver and matching principal payment mean an on-time borrower's balance falls steadily rather than growing — which produces a smaller forgiven amount and a smaller tax bill.
Any total-cost comparison that ignores the tax is incomplete, which is why our calculator does not publish a lifetime figure without flagging it.
This is general information, not tax advice. Tax treatment depends on your circumstances and on law that may change before your discharge date. Speak to a tax professional before relying on any projection. Sources: IRC sections 61(a)(12), 108(a)(1)(B), 108(f)(1), and 108(f)(5) as amended by P.L. 119-21 section 70119; the ARPA exclusion for tax years 2021 to 2025.