What to Know About Taxes and Student Loan Forgiveness

Did you know that under normal circumstances, you pay income taxes on canceled or forgiven student loan debt? 

Even though you’re not seeing a SS Reader in income from it, most forgiven student loans can result in a higher IRS bill. This is a pretty big deal, as student loan forgiveness can be tens or sometimes hundreds of thousands of dollars. 

However, if you recently had your student loans forgiven, you’re in for some good news. Your forgiveness likely won’t be taxed like it would be in a normal tax year. But act fast – this provision isn’t likely to last beyond December 31, 2025.

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What are the Typical Rules for Taxes and Student Loan Forgiveness? 

Usually, any amount of student loan debt your lender forgives counts as taxable income — regardless of whether you have federal or private student loans. 

Finance writer and student loan counselor Kat Tretina said the only exception is if you manage to get your federal student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. Loans forgiven through PSLF do not count as taxable income – even after December 31, 2025.

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Some Examples

Pretend it’s 2019, and you have a fairly simple tax return. Your only true, money-in-the-bank income is a $60,000 salary, but you had $20,000 in student loan debt forgiven through an income-driven repayment plan. For simplicity’s sake, we’ll pretend you have no spouse and no dependents, and you didn’t take any extraneous deductions outside of the standard deduction.

Before student loan forgiveness, your tax bill would have been $6,380. But because that extra $20,000 in forgiveness counted as income, your tax burden would have actually been $10,780. That’s an extra $4,400 you would have owed to the IRS. Quite a big difference! 

It should be noted that you likely would have had other deductions, like a deduction for student loan interest you paid throughout the year. This exercise gives you an idea of just how big a jump it can be in theory. 

Now, let’s say it’s the same year, same salary, same tax situation. The only difference is that your federal student loan was forgiven through PSLF instead of an income-driven repayment plan. In that case, there would have been no difference in your tax bill, as the forgiven amount wasn’t taxable. 

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Why are Cancelled Student Loan Amounts Not Taxable in 2025? 

In 2021, the Biden administration passed the American Rescue Plan (ARP). One thing this legislation did was make any student loan debt forgiveness not taxable – but only for a limited time. This ARP provision only applies to student loans that were forgiven or cancelled between January 1, 2021 and December 31, 2025. 

It does, however, apply to any type of student loan. It can be a federal loan forgiveness program – like forgiveness through an income-driven repayment plan. Or, it can also be a loan that your private lender decides to forgive or cancel. 

While technically there’s a chance that this change in taxability could be extended beyond the current 2025 cutoff, Tretina thinks the odds of that happening are slim. 

TIP: While Total and Permanent Disability (TPD) discharge of federal student loans technically falls under the ARP, this type of discharge was already not taxable from January 1, 2018 through December 31, 2025 thanks to the TCJA. Under either provision, though, discharged amounts will be taxable effective January 1, 2026 without further legislative action. You may qualify for TPD discharge even if you’re not “totally and permanently” disabled – the name is a little misleading. But that’s a conversation for another day. 

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An Example

Let’s say $80,000 of your student loans are forgiven in 2025 through the Pay as You Earn (PAYE) program. Your salary is $40,000. Because it’s 2025, you won’t be taxed on the extra $80,000. Your taxable income before the standard deduction is still only $40,000.

But let’s say that same amount was forgiven through PAYE in January of 2026. The way things stand right now, your total taxable income prior to the standard deduction for the 2026 tax year would be $120,000. That’s the $40,000 salary plus the $80,000 in forgiven student loan debt.  

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What About State Taxes? 

In most states, the amount of your forgiven student loan debt is not taxable at the state level. At the time of writing, there are only three states that tax this forgiveness as income – even in a year like 2025 where the federal government isn’t counting it. Those states are: 

Tretina said this is a notable change from two or three years ago, when more states were still taxing cancelled student loan debt as income.

She also points out that some states have their own student loan debt forgiveness or repayment assistance programs. These programs may come with different rules on taxability than federal student loans. 

Some states may not tax loans paid off with state assistance, while others will — even if they’re not taxing the federal loan forgiveness like Indiana, Mississippi and North Carolina do.

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2025 is the Year to Get Your Student Loans Forgiven

It’s almost always ideal to pay off your student loans as early as possible. But if you qualify for any type of forgiveness or discharge in 2025, you’ll want to act particularly quickly. Taking advantage of the lack of taxability on these forgiven amounts could end up saving you thousands on your tax return. 

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Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog, DISABILIFINANCE and the author of “The Feminist Financial Handbook.” She is a regular contributor to The SS.