Important points
- Students eligible for loan forgiveness in 2025 won’t owe taxes on their forgiven loans.
- To have a loan forgiven, borrowers must meet specific payment and plan requirements.
The Department of Education has restarted the student loan forgiveness process, but there are a few steps borrowers should take to avoid federal taxes on forgiven loans.
Recently, the Department of Education announced the return of student loan forgiveness for most income-driven repayment plans. However, there’s no clear timeline for when eligible borrowers will actually receive forgiveness. Those who qualify in 2025 might need to wait until the following year for their loans to be officially forgiven.
Many borrowers are understandably anxious about getting forgiveness before the temporary tax policy established by former President Joe Biden expires on January 1, 2026. Nevertheless, the Department confirmed that if borrowers are eligible for forgiveness in 2025, they won’t be taxed on those forgiven amounts.
It’s advisable for borrowers to take necessary actions before the year’s end in order to sidestep taxes on any forgiveness they secure in 2025.
Why this matters to you
Next year, borrowers might find themselves facing significant tax bills on their loan forgiveness. For those who are set to receive forgiveness in 2025 but haven’t yet, there are a few important steps to ensure that forgiveness is tax-free.
1. Check if your repayment plan is eligible for forgiveness
The Department of Education has resumed tax-free loan forgiveness processing for borrowers under various income-driven repayment plans, including pay-as-you-earn plans.
However, those utilizing “valuable education savings” are still not eligible for this forgiveness. The SAVE program, which was introduced during Biden’s term, is currently held up by legal challenges.
Borrowers under SAVE are still in a grace period, meaning their payments aren’t counted toward forgiveness. Yet, some borrowers might reach the required payment threshold before this grace period ends. If they switch to IBR, ICR, or PAYE by December 31, 2025, their loans could be forgiven without tax implications.
Borrowers can initiate a transfer of their repayment plan.
2. Check the number of payments
To qualify for tax-free forgiveness, borrowers need to complete either 240 or 300 payments by 2025, depending on their repayment plan. It’s a good idea to get in touch with your loan servicer to find out how many qualifying payments you’ve made and if your loan balance will be forgiven.
Here’s a quick reference for payments needed based on IDR plan type:
| Repayment plan | Number of monthly payments required |
|---|---|
| IBR Plan (if taken out before July 1, 2014) | 300 |
| ICR Plan | 300 |
| Paid Plan | 240 |
Note: Payments made during a grace period don’t qualify towards forgiveness, aside from those made during COVID-related suspensions.
3. Organize your documents
If you get confirmation from your loan servicer that you’re eligible for tax-free forgiveness, it’s crucial to keep that information safe.
The Department of Education regards the moment a borrower becomes eligible as the “effective date of loan forgiveness.” It’s wise to verify your eligible payments with your loan servicer to ensure you meet the qualifications for forgiveness in 2025.
4. Find out if you need to pay state taxes on your pardon
While those eligible for forgiveness in 2025 won’t owe federal taxes, some states still impose taxes on loan forgiveness. Here’s a quick overview:
Arkansas: Residents are taxed on loan forgiveness unless it’s through Public Service Loan Forgiveness or Total Disability.
Indiana: Loans forgiven due to total and permanent disability, bankruptcy, or student death are taxed, except for PSLF and other specific programs.
Mississippi: The only loan forgiveness not subject to tax is through the CARES Act.
North Carolina: Tax is assessed on forgiveness unless related to total disability or death.
Wisconsin: Tax applies unless the forgiveness stems from specified programs like PSLF or cases of death or total disability.
