Student loan forgiveness taxes are back in 2026. The federal exemption that made most discharges tax-free from 2021 through 2025 expired on December 31, 2025, and Congress did not extend it.1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes If your remaining balance is forgiven this year through an income-driven repayment plan or another non-exempt program, the forgiven amount is generally taxed as ordinary federal income, and your state may tax it too. Several forgiveness programs remain permanently tax-free, and an insolvency exception can reduce or wipe out the bill for borrowers who don’t qualify for those programs.
Why Forgiven Debt Is Treated as Income
The IRS treats canceled debt the same way it treats wages. Under 26 U.S.C. § 61(a)(11), gross income includes income from the discharge of indebtedness.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined If you borrowed $40,000 and only repaid $15,000 before the remaining $25,000 was forgiven, the IRS views that $25,000 as taxable income in the year of discharge.
The impact hits hardest on income-driven repayment plans. After 20 or 25 years of payments, whatever balance remains is forgiven, and because interest often makes the balance grow during repayment, the forgiven amount can be far larger than the original loan. A borrower who took out $60,000 could see $90,000 or more forgiven, generating a tax bill that easily reaches five figures. For someone in the 22% bracket with $50,000 forgiven, the additional federal tax alone would be around $11,000.
Forgiveness Programs That Are Still Tax-Free
Section 108(f) of the Internal Revenue Code permanently excludes certain student loan discharges from gross income, regardless of when they occur.3Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness These exclusions do not expire.
Public Service Loan Forgiveness
Borrowers who work full-time for a qualifying government agency or nonprofit and make 120 monthly payments under a qualifying repayment plan can have their remaining federal loan balance forgiven tax-free.4Federal Student Aid. How to Manage Your Public Service Loan Forgiveness Progress on StudentAid.gov The 120 payments don’t need to be consecutive, but the employment requirement must be met for each payment that counts. PSLF forgiveness has always been excluded from income under Section 108(f)(1).
Teacher Loan Forgiveness
Educators who teach for five complete and consecutive years at qualifying low-income schools can receive up to $17,500 in tax-free forgiveness on their Direct Subsidized and Unsubsidized Loans.5Federal Student Aid. 4 Loan Forgiveness Programs for Teachers1Taxpayer Advocate Service. What to Know about Student Loan Forgiveness and Your Taxes
Death and Total and Permanent Disability
Loans discharged because a borrower dies or becomes totally and permanently disabled are excluded from gross income under 26 U.S.C. § 108(f)(5).6Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness This applies to both federal and private education loans. The borrower must include a Social Security number on the tax return for the year of discharge to claim the exclusion.
Borrower Defense and School Closure Discharges
If your school closed while you were enrolled, or you succeeded on a borrower defense claim based on a school’s unlawful conduct, IRS Revenue Procedure 2020-11 provides a safe harbor: the agency will not treat the discharge as gross income.7Internal Revenue Service. Revenue Procedure 2020-11 The safe harbor also covers settlements resolving allegations of deceptive practices by schools or private lenders, and it protects any education tax credits or deductions you previously claimed using the discharged loan proceeds. The guidance applies to both federal and private student loans discharged in tax years beginning on or after January 1, 2016.8Internal Revenue Service. Revenue Procedure 2017-24
Health Professional Loan Repayment Programs
Payments through the National Health Service Corps loan repayment program and state-level programs for health professionals serving in underserved areas are excluded from gross income under the Affordable Care Act. This exclusion has been in effect for tax years beginning after December 31, 2008.
The Insolvency Exception
If your forgiveness doesn’t fit any of the permanent exclusions, you may still avoid tax through the insolvency exclusion. Under 26 U.S.C. § 108(a)(1)(B), you can exclude canceled debt from income to the extent you were insolvent immediately before the cancellation.6Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Insolvent means your total liabilities exceeded the fair market value of your total assets at that moment.
Say you had $45,000 in total assets and $75,000 in total debts right before $30,000 of student loans were forgiven. You were insolvent by $30,000, so you could exclude the entire $30,000. If you were only insolvent by $15,000, you could exclude $15,000 and would owe tax on the remaining $15,000.
The IRS insolvency worksheet in Publication 4681 walks you through the calculation.9Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments You tally the fair market value of everything you own as of the day before the discharge: bank balances, vehicles, home equity, retirement account balances, household goods, investments, and life insurance cash value. On the liability side, include every debt: mortgage, car loans, credit cards, medical bills, and other student loans. Retirement accounts count as assets even though creditors typically can’t seize them, a point that catches many borrowers off guard.
State Taxes Are a Separate Question
A federal exclusion doesn’t automatically shield you at the state level. Many states calculate income tax starting from federal adjusted gross income, so roughly 20 states that automatically conform to federal definitions will treat student loan forgiveness as taxable in 2026 now that the federal exemption has lapsed. Others decouple from federal changes, and some do so retroactively. A few states have no income tax at all. Checking with your state’s tax authority before filing is the only reliable way to know where you stand.
Your 1099-C and How to Report the Discharge
When a lender cancels $600 or more of your debt, it must file Form 1099-C with the IRS and send you a copy, usually in January or February of the following year.10Internal Revenue Service. Instructions for Forms 1099-A and 1099-C The form shows the amount canceled and a code identifying why. Code G, cancellation because the creditor stopped collection, is common for income-driven repayment forgiveness.
Receiving a 1099-C does not automatically mean the full amount is taxable. If a permanent exclusion or the insolvency exception applies, you report the exclusion on your return. But you do have to act on the form: the IRS gets a copy, and unexplained silence draws a notice.
If the forgiven amount is taxable, report it as other income on Schedule 1 of Form 1040, line 8c.9Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments It flows into your total income and is taxed at your ordinary rate.
If you’re excluding some or all of the forgiven amount, complete and attach Form 982. Line 1b is where you claim the insolvency exclusion specifically.11Internal Revenue Service. Instructions for Form 982 The form requires you to reduce certain tax attributes, such as net operating loss carryovers and cost basis in property, dollar for dollar against the excluded amount. Keep your completed insolvency worksheet and supporting documents in case the IRS questions the exclusion later.
If a 1099-C arrives after you’ve already filed, or you realize you missed a discharge from a prior year, file an amended return using Form 1040-X and attach any supporting forms.12Internal Revenue Service. Instructions for Form 1040-X
What Happens if You Don’t Report It
Ignoring a 1099-C is expensive. The IRS matches its copy against your return, and three layers of consequences can stack:
- An accuracy-related penalty of 20% of the underpayment if you understate your tax by the greater of 10% of the correct tax or $5,000.13Internal Revenue Service. Accuracy-Related Penalty
- A failure-to-pay penalty of 0.5% of the unpaid amount per month, up to 25%.14Internal Revenue Service. Failure to File Penalty
- Interest at 7% per year, compounded daily, as of early 2026, adjusted quarterly.15Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
On a $10,000 tax liability from forgiven debt, a borrower who ignores the issue for a year could face roughly $2,000 in accuracy penalty alone, plus interest and monthly failure-to-pay charges. Filing on time and reporting the discharge, even if you cannot pay in full, avoids the worst of it.
If You Can’t Afford the Tax Bill
The IRS offers structured ways to pay over time. If you owe less than $100,000 in combined tax, penalties, and interest, you can request a short-term payment plan that gives you up to 180 days to pay in full with no setup fee.16Internal Revenue Service. Payment Plans; Installment Agreements For larger amounts or longer timelines, a long-term installment agreement lets you make monthly payments. If you owe $50,000 or less and have filed all required returns, you can set this up online. The setup fee for a direct-debit arrangement is $22 when you apply online, and low-income taxpayers may qualify for a fee waiver.
Interest continues to accrue on any unpaid balance during an installment agreement, so paying faster reduces the total cost. An offer in compromise, where the IRS accepts less than the full amount, exists as a last resort for borrowers who can demonstrate that paying the full amount would create economic hardship.
Plan Ahead With Estimated Payments
If you know forgiveness is coming later this year, don’t wait until next April. The IRS expects estimated quarterly payments if you’ll owe $1,000 or more when you file.17Internal Revenue Service. Estimated Taxes Missing them can trigger an underpayment penalty on top of the tax itself. Because forgiveness happens at a specific point in the year, the annualized income installment method on Form 2210 lets you make the estimated payment in the quarter the forgiveness occurs rather than spreading it across all four.
Multiply the expected forgiven balance by your marginal tax rate for a rough savings target. Setting that money aside before the discharge posts is the single most useful step any borrower approaching forgiveness can take.