Crucial Insights at a Glance
- Come 2026, any forgiveness following income-driven repayment plans will count as taxable income, potentially leading to hefty tax bills for borrowers with modest earnings.
- Public service and profession-specific forgiveness programs — like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness — retain their tax-exempt status.
- Tax liabilities may be trimmed or sidestepped by leveraging insolvency exclusions (IRS Form 982), negotiating offers in compromise (IRS Form 656), or arranging payment plans (IRS Form 9465).
- State tax rules can differ significantly: some states still slap taxes on forgiven loans even when the federal government doesn’t, so double-check your state’s stance on conformity with federal income tax laws.
A New Tax Chapter for Income-Driven Loan Forgiveness Begins in 2026
Effective January 1, 2026, student loan forgiveness from income-driven repayment schemes will no longer enjoy tax-free status — instead, it will be treated as income by the IRS.
Whenever your outstanding loan balance gets wiped clean via forgiveness or discharge, the IRS considers this canceled debt akin to receiving cash that settles your debt. Lenders will issue IRS Form 1099-C for amounts canceled of $600 or more, signaling income you need to report.
Even if no 1099-C lands in your mailbox, you are obligated to declare the forgiven debt on line 8c of Schedule 1 attached to IRS Form 1040.
It’s worth noting: While some forgiveness and discharge types are exempt from federal income tax, others will come under the IRS’s taxable umbrella starting next year.
Forecast of Taxable Student Loan Cancellations in 2026 and Beyond
Between 2021 and 2025, all student loan forgiveness was shielded from federal income tax. This protection expires in 2026 for debts forgiven via income-driven repayment plans, which will then be treated as ordinary income.
This tax shift impacts forgiveness through plans such as Income-Based Repayment (IBR). Following a ruling by the 8th Circuit Court of Appeals, broader forgiveness options under Income-Contingent Repayment, Pay-As-You-Earn, REPAYE, and SAVE plans are no longer universally available. However, payments made under these plans can still qualify borrowers for forgiveness under IBR and Revised Pay As You Earn (RAP) schemes.
Meanwhile, all other student loan forgiveness initiatives continue to remain tax-exempt under existing legislation.
Keeping Tabs on Student Loan Policy Shifts
Federal student loan programs are in a constant state of flux. Staying agile and informed is the key to navigating your financial future and protecting your pocketbook.
Examples of Tax-Free Forgiveness Programs
- Public Health Service Act Forgiveness: Tax-exempt
- Closed School Discharge: Tax-exempt
- Unpaid Refund Discharge: Tax-exempt
- Employer-Provided Educational Assistance: Tax-exempt up to $5,250 per year (P.L. 119-21)
Note on State Taxation: Despite federal tax exemptions, certain states like Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin tax forgiven student loans as income or taxable benefits. State rules vary — some follow federal standards as of a particular date, while others maintain independent definitions — affecting how forgiven loans are treated.
Such disparities further extend to forgiveness at the end of income-driven repayment plans, closed school discharges, and borrower defense to repayment scenarios.
The Financial Toll of Taxing Loan Forgiveness
Borrowers wiping out debt after decades on income-driven repayment plans could confront unexpectedly steep tax bills. Though the tax owed is less than the forgiven loan sum, it might still be beyond the borrower’s financial reach.
The irony lies in this: those least able to pay—borrowers with zero or minimal monthly payments—end up with the largest tax burdens. For instance, under IBR, if a borrower’s adjusted gross income (AGI) stays below 150% of the poverty threshold, monthly payments can be zero, but interest steadily accumulates and inflates the loan balance.
To illustrate:
- At a 5% interest rate, the debt could swell to 225% of its starting value after 25 years.
- In a 12% tax bracket, the tax bill might reach approximately 27% of the original loan amount.
Student Loan Forgiveness Is Far from Dead — Here’s the Reality
Consider a client of The Institute of Student Loan Advisors (TISLA) who typifies the struggle. Betsy Mayotte, TISLA’s founder, recounted at the Higher Education Finance Symposium that this individual has been on the legacy IBR plan with $0 monthly payments, surviving mainly on Social Security for 25 to 30 years.
If her loan is forgiven by year-end — she qualifies having made sufficient payments — she faces a staggering six-figure tax bill, raising the real concern of insolvency filings.
What Are Your Options If The Tax Bill Is Too Heavy?
- Insolvency Exclusion: If your total debts outweigh your assets after loan forgiveness, the IRS may exclude forgiven debt from your taxable income by filing Form 982. For further guidance, see IRS Publication 4681.
- Offer in Compromise: Without insolvency, a tax professional can negotiate with the IRS on your behalf via Form 656 to reduce owed tax.
- Installment Agreement: You might arrange to pay your tax bill over up to six years through Form 9465.
Steps to Take Now to Navigate These Changes
- Keep an accurate record of which student loan forgiveness program you’re enrolled in.
- Watch for IRS Form 1099-C from your loan servicer, signaling forgiven debt.
- Ascertain whether your forgiveness is considered taxable income on the federal level.
- Verify your state’s income tax rules regarding student loan forgiveness.
- Seek advice from a tax professional if you anticipate debt forgiveness post-2025.
