Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. There are, however, a few exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions.
In 2026, some student loan forgiveness will become taxable. A change in tax policy for 2026 has created some confusion over how certain forms of student loan forgiveness may now be taxed. Certain exclusions in The American Rescue Plan Act (ARP) have expired, creating changes. See the chart below and review more details in this NASFAA January 2026 article.
Tax Free vs. Taxed Student Loan Forgiveness
| Public Service Loan Forgiveness | Tax-Free |
| Teacher Loan Forgiveness | Tax-Free |
| NHSC Loan Repayment Program | Tax-Free |
| Income Based Repayment/Income Contingent Repayment Forgiveness (25-year) | Taxed (as of 2026) |
| Disability Discharge | Tax-Free (as of 2026) |
| Closed School Discharge | Tax-Free |
| Death Discharge | Tax-Free |
Which Student Loan Forgiveness Programs Are Tax-Free?
Nearly all student loan forgiveness programs are tax-free. Most borrowers will qualify for forgiveness under the Public Service Loan Forgiveness (PSLF) program, which is not taxed.
If questions persist about whether a program is taxable, it is best to speak with a tax advisor or the Internal Revenue Service (IRS). While the IRS states that most canceled or forgiven debt is taxable, certain qualified student loans are an exception. IRS Topic no. 431 defines these exceptions specifically:
- Certain qualified student loans containing loan provisions for cancellation based on length of employment in certain professions for a broad class of employers.
- Certain student loan discharges after December 31, 2020, and before January 1, 2026.
- Amounts received or forgiven under certain student loan repayment assistance programs.
Which Student Loan Forgiveness Programs are Taxable?
The lapse of the American Rescue Plan Act has made some student loan forgiveness programs taxable.
Under these provisions, loans forgiven under an income-driven repayment plan, like the Income-Based or Income-Contingent plans, are subject to being taxed the year after they are forgiven. For example, if your loan is forgiven in 2026, you will have to pay taxes on the amount forgiven in 2027.
For many students, the amount forgiven is tens of thousands of dollars, providing a huge relief to their personal finances. However, the amount they must pay in taxes the following year could be significant, depending on how much is forgiven.
What Changed in 2026? Expiration of APR Inclusions Explained
The American Rescue Plan Act was a COVID-19 Relief bill passed by Congress and signed by then-President Joe Biden. It sought to alleviate the financial impacts of the Coronavirus pandemic.
The bill included a provision exempting income-driven repayment plans from taxation. This covered student loans forgiven from December 31, 2020, until December 31, 2025. As the bill has expired, so too have the tax protections of income-driven repayment plans for taxability.
How Much Will Be Owed in Taxes on Forgiven Loans?
Borrowers who are working toward student loan forgiveness and hold an account that will be treated as taxable income once it’s forgiven need to do so with foresight and planning. There are ways to be prepared to pay the taxes on the forgiven debt:
1. First calculate annual income with the amount forgiven.
2. Determine whether these two amounts added together designate a new federal tax bracket, potentially creating a “tax bomb,” i.e., an unexpected tax bill.
3. Begin saving for the tax bill in addition to making monthly payments toward the student loan.
Ultimately, the amount owed in taxes depends on the amount of debt forgiven. Using tax calculators well before the loan is expected to be canceled or forgiven will indicate what will be owed. Utilizing the remaining time on the loan to save for the tax bill can offset a “tax bomb” scenario.
State Taxes on Student Loan Forgiveness
Federal tax laws differ from state tax laws. While most student loan forgiveness programs are tax-exempt, there are a handful of states that require a state tax on the amount forgiven:
- Arkansas: Student loan forgiveness is taxable in this state, although PSLF and forgiveness for disability are excluded from taxability.
- Indiana: All federal loan forgiveness is taxable in Indiana, except for PSLF, Teacher Loan Forgiveness, National Health Service Corps, and, in the case of total and permanent disabilities, bankruptcy, or death.
- Mississippi: This state taxes all student loan forgiveness.
- North Carolina: All student loan forgiveness programs are taxable unless the loan is discharged in the event of death or total or permanent disability.
- Wisconsin: All student loan forgiveness is taxed in this state, except if it was through PSLF, death of a student, total and permanent disability, teacher loan forgiveness program, or National Health Service Corps Loan Repayment program.
Federal Income Tax Treatment
Section 61(a)(12) of the Internal Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any calendar year. However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1) states that in the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.
A “student loan” is defined in IRC section 108(f)(2) as including any loan provided to help an individual attend an educational institution. The loan must have been made by the United States or a US agency, a state government (including US territories and possessions and the District of Columbia) or any political subdivision of a state government, or a 501(c)(3) charitable organization.
Loans made by educational institutions also fall within the definition of a student loan, provided that either the funds came from one of the other three sources or the loan was made under a repayment assistance program of the educational institution that is designed to encourage the institution’s students to serve in occupations or areas with unmet needs. The service must be for or under the direction of a governmental unit or tax-exempt 501(c)(3) charitable organization.
The student must not be employed by or providing service to the educational institution that is discharging the student loan. Forgiveness of refinanced student loans are also eligible for tax free treatment under certain circumstances.
