A student loan balance forgiven through the federal Total and Permanent Disability (TPD) discharge program is not subject to federal income tax, and as of July 2025 that exclusion is permanent. For most borrowers, there are no taxes on student loan forgiveness due to disability at the federal level, no special form to file, and no 1099-C to report. State income tax is a separate question, and in a handful of states the discharged amount can still be taxable.
The Federal Exclusion Is Now Permanent
Before 2018, a TPD discharge was treated as cancellation-of-debt income, and borrowers who were too disabled to work could receive a discharge worth tens of thousands of dollars and then face an IRS bill on money they never saw. The Tax Cuts and Jobs Act of 2017 amended Internal Revenue Code Section 108(f)(5) to exclude TPD and death-related student loan discharges from gross income for discharges occurring after December 31, 2017.1Tax Notes. Legislative History of 26 USC 108 That original provision was set to expire at the end of 2025.
The One Big Beautiful Bill Act (P.L. 119-21), signed on July 4, 2025, removed the sunset. For any TPD discharge occurring after December 31, 2025, the forgiven balance is excluded from gross income under the amended IRC Section 108(f)(5), with no expiration date.2Cornell Law Institute. 26 U.S. Code Section 1083Protect Borrowers. Memo: How OBBBA Will Raise Taxes for Thousands of Borrowers
This puts disability discharges in a different position from most other student loan forgiveness. The broader American Rescue Plan Act exclusion, which had made all types of student loan forgiveness tax-free through 2025, expired on December 31, 2025. Debt canceled under income-driven repayment plans became taxable again starting in 2026.4IRS Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes Disability discharges did not lose their protected status.
What to Do at Tax Time
For most borrowers, filing is straightforward. Loan servicers and lenders should not issue a Form 1099-C for a qualifying TPD discharge.5Federal Student Aid. Total and Permanent Disability Discharge If one arrives anyway, the IRS Taxpayer Advocate Service advises keeping the form for personal records but not including the amount as income on the return.4IRS Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes
The one requirement added by the OBBBA is that the borrower’s Social Security number must appear on the tax return for the year the discharge occurs in order to claim the exclusion.6Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness No special IRS form is needed to report the exclusion itself. Keep a copy of the discharge letter from the Department of Education or the lender in case questions come up later.
Which Tax Year the Discharge Falls In
The year in which the discharge counts depends on how the borrower qualified:
- VA documentation: the discharge is considered received on the date it is approved.
- SSA documentation or physician certification: for discharges processed under the older rules, the discharge was considered received at the end of the three-year post-discharge monitoring period. The Department of Education permanently eliminated income monitoring in July 2023, though a three-year reinstatement window still exists for non-VA borrowers if they take out new federal loans.7TICAS. TPD Program Overview and History
Borrowers whose discharge occurred before January 1, 2018, may still have owed federal income tax on the forgiven amount under the law in effect at the time.
Private Disability Discharges Are Covered Too
The permanent federal exclusion applies to federal student loans and to private education loans as defined in Section 140(a) of the Consumer Credit Protection Act (15 U.S.C. 1650(a)).2Cornell Law Institute. 26 U.S. Code Section 108 Private lenders are not required to offer a disability discharge, but if a private lender does cancel a loan because of the borrower’s disability, the forgiven amount gets the same tax treatment federal borrowers get.
State Taxes Can Still Apply
Federal Student Aid’s own guidance warns that a discharged balance “may be considered income for state tax purposes.”5Federal Student Aid. Total and Permanent Disability Discharge Whether a state taxes forgiven student debt depends on how it conforms to the federal Internal Revenue Code. States that automatically adopt the current version of the IRC generally follow the federal exclusion. States using an older, frozen version of the code, or that have decoupled from the federal student loan provisions, may treat the discharged amount as taxable income.
States identified in recent analyses as potentially taxing forgiven student loan debt include Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin, each for different conformity-related reasons.8Tax Foundation. Student Loan Debt Cancellation Tax Treatment California has also been identified as taxing student loan discharges under current law, based on its conformity date of January 1, 2015.9Tax Policy Center. Which States Tax Student Loan Forgiveness and Why It Is So Complicated Those assessments were made in the context of broader forgiveness programs, and some states have carved out their own exemptions that may cover disability-related discharges. Borrowers in a state that does not follow the current federal code should check with the state tax agency or a tax professional before filing.
If a Tax Bill Does Arise: The Insolvency Fallback
A borrower who ends up owing tax on forgiven student debt, whether because of state rules or because the discharge occurred before the federal exclusion took effect, may still be able to reduce or eliminate the liability using the insolvency exclusion under IRC Section 108(a)(1)(B). To claim it, the taxpayer must show that total liabilities exceeded total assets at the time of the discharge and file Form 982 with the tax return.10IRS. Tax Topic 431 – Canceled Debt: Is It Taxable or Not The insolvency exclusion applies to any type of canceled debt and is separate from the disability provision. It requires individual proof, and the IRS itself has acknowledged the process is burdensome, but it remains available when other exclusions do not apply.