The American Rescue Plan Act’s temporary federal tax exemption for forgiven student loans expired on December 31, 2025. Starting January 1, 2026, canceled student loan balances are once again treated as taxable income at the federal level, which is the change most borrowers searching for information about student loan forgiveness tax after the American Rescue Plan need to understand.1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes Some forgiveness programs remain permanently tax-free under separate provisions, and the insolvency exclusion can shield borrowers whose debts exceed their assets.
What the ARPA Exemption Did
Section 9675 of the American Rescue Plan Act carved out a temporary exception to the general rule that forgiven debt counts as taxable income. Student loan discharges that occurred after December 31, 2020, and before January 1, 2026, were excluded from gross income entirely.1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes The coverage was broad: federal Direct Loans, private education loans from banks and credit unions, and institutional loans from colleges all qualified, as long as the loan had been used for postsecondary educational expenses. Lenders were instructed not to issue Form 1099-C for qualifying discharges during that window, which kept the IRS’s automated systems from flagging forgiven amounts as unreported income.
What Changes in 2026
Congress did not extend the exemption. If your lender cancels or forgives a loan balance in 2026, expect a Form 1099-C reporting the forgiven amount, and expect to report that amount as income on your 2026 return, filed in the 2027 tax season.1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes
This lands hardest on borrowers in income-driven repayment plans, which forgive any remaining balance after 20 or 25 years of qualifying payments. Someone reaching that milestone in 2026 or later owes federal income tax on the entire forgiven amount at their ordinary income tax rate. On a $40,000 forgiven balance, a borrower in the 22% bracket would face roughly an $8,800 federal tax bill. Higher earners would owe substantially more, because the forgiven amount stacks on top of your other income for the year and can push you into a higher bracket.
If Your Forgiveness Straddles 2025 and 2026
Timing matters. If you were notified in 2025 that your loan qualified for forgiveness but the paperwork was not completed until 2026, you may still fall within the tax-free window depending on when the discharge legally took effect.1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes Ask the Department of Education or your loan servicer for the official discharge date if you’re in that position, and hold on to any written confirmation.
State Taxes Are a Separate Question
Around 20 states automatically conform their tax codes to federal changes, so forgiven student debt will generally be taxable at the state level in those states too. A handful of states declined to adopt the ARPA exemption even while it was in force. If you live in a state with an income tax, check how your state treats forgiven student loans, because the answer varies and your legislature may or may not act to provide relief.
Forgiveness Programs That Stay Tax-Free
Several programs have their own permanent tax exclusions written into federal law, independent of the expired ARPA provision.
Public Service Loan Forgiveness is the most significant. If you work full-time for a qualifying government or nonprofit employer and make 120 monthly payments under an eligible repayment plan, any remaining balance is forgiven tax-free. The exclusion sits in a different part of the tax code — it applies to loan discharges granted because you worked in certain professions for qualifying employers — and it has no expiration date.2Office of the Law Revision Counsel. 26 U.S. Code 108 – Income from Discharge of Indebtedness
Other programs whose forgiveness remains permanently tax-free:
- Teacher Loan Forgiveness of up to $17,500 for teachers who serve five consecutive years in low-income schools.
- Perkins Loan cancellation for borrowers in qualifying public service occupations, including teaching, nursing, law enforcement, and military service.
- Closed school discharges, if your school closed while you were enrolled or shortly after you withdrew.
- False certification and unpaid refund discharges, which are borrower defense-related.
Discharges for death or total and permanent disability have their own exclusion in the tax code, though there is some uncertainty about whether that particular provision continues beyond 2025 in its current form.3Office of the Law Revision Counsel. 26 USC 108 – Income from Discharge of Indebtedness Confirm the tax treatment with a tax professional before filing if you or a family member received one of these discharges.
The Insolvency Exclusion
If you receive taxable forgiveness in 2026 and can’t afford the resulting tax, the insolvency exclusion may reduce or eliminate what you owe. Federal tax law lets you exclude forgiven debt from your income to the extent that your total liabilities exceeded the fair market value of your total assets immediately before the discharge.3Office of the Law Revision Counsel. 26 USC 108 – Income from Discharge of Indebtedness
The math is straightforward. Add up everything you owe — every debt, not just student loans — and compare it to the fair market value of everything you own. If your debts exceed your assets by $30,000, you can exclude up to $30,000 of forgiven debt from taxable income. You claim the exclusion on Form 982, filed with your tax return.4Internal Revenue Service. What If I Am Insolvent? Many borrowers who spent decades in income-driven repayment with growing balances carry significant debt relative to their assets, so it is worth running the numbers even if you assume you won’t qualify.