Since March 13, 2020, federal student loan borrowers haven't had to think much about their student loan payments. The U.S. Department of Education suspended payments, interest was set at 0%, and millions of borrowers hoped President Biden's debt relief plan would come to fruition.

But payments started up again in October 2023, but not for long. In February 2024, the Biden administration canceled an additional $1.2 billion for 153,000 borrowers who are enrolled in the Saving on a Valuable Education (SAVE) repayment plan.

And as of late March 2024, "The Biden administration approved another round of student debt discharge for more than 78,000 borrowers under the public service loan forgiveness (PSLF) program that impacts teachers, nurses, firefighters, social workers, and other public servants, including the military," wrote Yahoo Finance reporter Ronda Lee.

"The discharged amount totals $5.8 billion in student loan debt. The total debt relief under PSLF is now $62.5 billion for 871,000 borrowers since October 2021," Yahoo Finance reported.

Even with this victory, student loan forgiveness isn't always a clean break.

Some forms of loan forgiveness are taxable. If you aren't prepared, the taxes on student loan forgiveness can be significant.

Do I have to pay income taxes on student loan forgiveness?

According to the most recent Federal Student Aid Data Center data, 43.6 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 tax consequences could lead to surprise bills — sometimes called the student loan tax bomb — when borrowers submit their tax returns.

The IRS considers canceled debt, including most forms of student loan debt forgiveness or student loan discharge, to be 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 that are discharged between January 1, 2021, and December 31, 2025.

The American Rescue Plan applies to all student loan forgiveness programs but only affects federal income taxes. Although some states adopted similar measures for state income taxes, not all followed suit.

As of 2023, Indiana, North Carolina, Mississippi, and Wisconsin have stated that the balance of forgiven student loans will be taxed as income. Taxpayers in Arkansas and California could face the same fate — the states are currently reviewing their tax laws and have yet to make a determination (as of February 2024).

[A previous version of this article stated Minnesota was one of the states to declare that forgiven student loan balances would be taxed as income. In the most recent Minnesota legislative session, lawmakers voted to amend Minn. Stat. § 290.0132, subd. 24, and "permanently adopt the American Rescue Plan Act exclusion for discharged student loans...Effective for taxable years beginning after December 31, 2022."]

Student loan forgiveness tax consequences after 2025

The American Rescue Act's provisions regarding student loan forgiveness taxes will end on December 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 who work for nonprofit organizations, government agencies, or public service groups may qualify for PSLF if they work for a qualifying employer full-time for 10 years and make 120 qualifying monthly payments. After reaching those milestones, borrowers can apply for debt cancellation. Once approved, the government forgives the remainder of the 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.

Income-Driven Repayment (IDR) Discharge

IDR plans are for federal loan borrowers who have trouble affording their payments under the standard 10-year repayment plan. IDR plans extend the loan terms and base the borrower's monthly payments on a percentage of their discretionary income. The four IDR plans are:

• Income-Based Repayment (IBR)

• Income-Contingent Repayment (ICR)

• Pay As You Earn (PAYE)

• Saving on a Valuable Education (SAVE; formerly known as Revised Pay As You Earn, or REPAYE)

The government will discharge the remainder if the borrower still has a balance at the end of their loan term. However, the forgiven loans are 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 belonging to borrowers who their college misled, or if their schools engaged in misconduct and violated state laws.

The IRS and the U.S. Department of the Treasury have issued notices that clarify 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.

How taxes are handled depends on when you qualify for discharge.

If you received discharge before January 1, 2018, the discharged loan amount is subject to federal income taxes. Loans discharged between January 1, 2028, and December 31, 2025, are exempt from federal income taxes. How TPDD will be taxed in 2026 and beyond is not clear at this time.

Read more: Don't spend extra just to file your taxes. Here are 7 free tax filing options.

Tax on student loan forgiveness for private student loans

Private student loans aren't eligible for federal loan programs like PSLF or TPDD. However, borrowers with private student loans may qualify for other loan forgiveness or discharge programs. For example, some private lenders will discharge the loans of 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.

Frequently asked questions

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 expect a loan discharge after 2025. But because those taxable programs are based on your income, you may have enough cash to pay down the debt; if you do, 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 use the American Institute of CPAs marginal tax rate calculator to see how loan forgiveness will impact your tax bill.

The tool can give you a ballpark figure of how much you'll owe so you can plan ahead. If you expect 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. PSLF is never taxed as income, so any extensions wouldn't impact borrowers working toward loan forgiveness through that program.

This article was edited by Rebecca McCracken