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Some federal student loan borrowers are eligible for student loan forgiveness through programs like Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness (TLF), and after making years of payments under an income-driven repayment (IDR) plan.
These programs provide significant relief. As of the end of 2024, PSLF forgiveness eliminated $79.4 billion in combined outstanding loans for over 1 million borrowers.
However, student loan forgiveness isn't always a clean break. Depending on the type of loan forgiveness you qualify for and when the loans are discharged, that debt relief is not necessarily tax-free.
Do I have to pay income taxes on student loan forgiveness?
According to the most recent data released by the Federal Student Aid Data Center, 42.7 million people have outstanding federal student loans. For those struggling to manage their payments, loan forgiveness can seem like a dream come true. But student loan forgiveness could lead to a surprise tax bill — sometimes referred to as the student loan tax bomb — when borrowers submit their tax returns.
The IRS considers canceled debt, including most forms of student loan forgiveness or discharge, as taxable income.
However, borrowers working toward loan forgiveness have been exempt from taxes thanks to the American Rescue Plan Act of 2021. This measure made forgiven student loans exempt from federal income taxes, but it only applies to loans discharged between Jan. 1, 2021 and Dec. 31, 2025.
The American Rescue Plan applies to all student loan forgiveness programs, but it only affects federal income taxes. Although some states adopted similar measures for state income taxes, not all followed suit.
As of 2025, five states tax the discharged amount of forgiven student loan debt: Arkansas, Indiana, North Carolina, Mississippi, and Wisconsin.
Student loan forgiveness tax consequences after 2025
Currently, the American Rescue Act's provisions regarding taxes on forgiven debt will end on Dec. 31, 2025. From Jan. 1, 2026, onward, how student loan forgiveness and discharge programs are taxed depends on the program:
Public Service Loan Forgiveness (PSLF)
Federal loan borrowers that work for nonprofit organizations, government agencies, or public service groups may qualify for PSLF. They must work for a qualifying employer full time for 10 years and make 120 qualifying monthly payments. After reaching those milestones, the government eliminates the remainder of their federal loan balance.
PSLF is one of the few programs that is excluded from federal income taxes; none of the forgiven loan amount is taxable as income, even after the American Rescue Plan expires at the end of 2025.
Teacher Loan Forgiveness (TLF)
Under the TLF program, teachers employed full time at a qualifying school for at least five full and consecutive academic years can qualify for up to $17,500 of loan forgiveness for federal Direct Subsidized and Unsubsidized Loans.
As of Jan. 1, 2021, the amount forgiven under TLF is not considered income by the IRS, so you don't have to pay federal income taxes on the amount of debt forgiveness.
Income-Driven Repayment (IDR) discharge
IDR plans are for federal loan borrowers who have trouble affording their student loan payments under the standard 10-year repayment plan. Income-driven repayment plans extend the loan terms and base the borrower's monthly payments on a percentage of their discretionary income. Currently, there are three active repayment plans:
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Income-Based Repayment
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Income-Contingent Repayment
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Pay As You Earn
If the borrower still has a balance at the end of their loan term — which can be 20 or 25 years, depending on the plan — the government will discharge the remainder. Under the American Rescue Plan, the discharged amount was exempt from federal taxes. However, once it expires in 2026, the forgiven loans will be taxable as income at the federal and state levels.
Borrower Defense to Repayment Discharge
Borrower Defense to Repayment Discharge is a program that eliminates federal student loans for borrowers who were misled by their colleges, or if their schools engaged in misconduct and violated state laws.
The IRS and the U.S. Department of the Treasury issued notices clarifying that loans discharged through borrower defense to repayment are not taxable as income.
Total and Permanent Disability Discharge (TPDD)
TPDD applies to borrowers who become totally and permanently disabled. The government will discharge the remaining loan balance for eligible federal loan borrowers.
Depending on where you live, the amount discharged may be taxable at the state level. For federal taxes, whether the discharged balance is taxable depends on when you qualified for TPDD:
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If you received discharge before Jan. 1, 2018: The discharged loan amount is subject to federal income taxes.
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If you received discharge between Jan. 1, 2018, and Dec. 31, 2025: These loans are exempt from federal income taxes.
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If you receive discharge in 2026 or later: Tax treatment in 2026 and beyond is not clear at this time.
What is the tax on private student loan forgiveness?
Private student loans aren't eligible for federal loan programs like PSLF or TPDD. But borrowers with private student loans may qualify for other loan forgiveness or discharge programs. For example, some private lenders offer loan cancellation for borrowers who become totally and permanently disabled.
The American Rescue Plan specifies that forgiven private student loans are also exempt from federal income taxes through the end of 2025. However, they may be subject to state income taxes.
Unless the American Rescue Plan is extended, discharged private student loans will also be considered taxable as income on federal taxes.
Taxes on student loan forgiveness FAQs
Can I pay down my balance to lower my tax bill?
Technically, you can pay down your loan balance to decrease your tax bill if you're expecting a loan discharge after 2025. But because those taxable programs are based on your income, if you pay down the debt, there's a chance your payments will go up in the future, decreasing the effectiveness of the forgiveness program.
How can I estimate how much I will owe in taxes due to student loan forgiveness?
How much you will have to pay in taxes depends on the amount of loan forgiveness you receive and your tax bracket. You can review the current income tax rates and brackets on the IRS website. If you are expecting a large tax bill, setting aside a little cash every month in a high-yield savings account or CD can help you prepare.
If Congress extends the Rescue Plan past 2025, how will that affect borrowers?
If Congress extends the American Rescue Plan past 2025, borrowers seeking loan forgiveness through IDR discharge, TPDD and private loan forgiveness programs would be exempt from federal income taxes. Under current rules, PSLF is never taxed as income, so any extensions wouldn't impact borrowers working toward loan forgiveness through that program.
