Important points
- The tax-exempt status for student loan forgiveness is set to end in 2025.
- This implies that borrowers receiving forgiveness in 2026 should brace for potential tax obligations.
- However, those qualifying for forgiveness before the end of 2025 won’t face tax charges, even if their discharge occurs in 2026.
If your federal student loans are lined up for forgiveness in 2026, it’s wise to check whether you’ll owe taxes.
During the pandemic, temporary tax regulations allowed borrowers on income-driven repayment plans from 2021 to the end of 2025 to avoid taxes on forgiven loans. Generally, qualifying criteria involve being enrolled in an active repayment plan, such as income-based repayment, and making qualifying payments for 20 to 25 years.
Starting next year, though, the rules will shift, meaning those eligible for forgiveness in 2026 may face increased tax liabilities.
Why is this important
It’s essential for borrowers to understand whether their 2026 loan forgiveness will be taxed, as this year is a good time to prepare for a likely boost in their tax burden.
Borrowers eligible for forgiveness in 2025
Many borrowers who met the requirements for student loan forgiveness this year have seen delays because of ongoing litigation.
However, the Department of Education recently indicated that borrowers qualifying in 2025 would not incur taxes on their forgiveness, even if processed in 2026.
Scott Buchanan, the executive director of the Student Loan Servicing Alliance, mentioned that borrowers qualifying for forgiveness in 2025 have started receiving their discharge. He anticipates most of the outstanding debts among those awaiting forgiveness will be resolved in early 2026.
“If someone qualifies in 2025, they could definitely see their forgiveness before tax season kicks in during March and April,” he noted.
Borrowers eligible for 2025 forgiveness don’t need to take any additional steps; the loan servicers will manage the process and inform the IRS of any forgiveness granted. However, servicers won’t send notifications while the forgiveness is still tax-free.
While these borrowers might not owe federal taxes on their discharges, some states could still impose tax obligations, irrespective of when the forgiveness occurs.
Borrowers receiving forgiveness in 2026
For those qualifying for forgiveness after 2026, there will be a federal tax requirement for the amount forgiven in the subsequent year.
You definitely don’t want to be caught off guard come tax season; nobody appreciates an unexpected surprise like a $2,000 tax increase,” Buchanan advised.
Borrowers who fulfill all required payments for forgiveness in 2026 will receive a 1099-C form from their servicer in January 2027, itemizing the forgiveness amount for reporting in their taxable income during tax time.
Next year, it’s suggested that these borrowers calculate how this tax exemption could affect their tax liabilities by assessing their tax rate.
Important
Since loan forgiveness is treated as taxable income, some borrowers may find themselves in a higher tax bracket, leading to a heftier tax bill—potentially thousands of dollars.
What this means for state taxes
“Remember, not all loan forgiveness amounts are taxable,” Buchanan mentioned. There are deductions available that might lessen your tax liability, and there are many software tools online to help estimate future tax outcomes.
Because most states typically follow the federal tax framework, many have also suspended taxes on student loan forgiveness.
It remains uncertain whether all states will reinstate taxes on forgiveness by year-end, but Buchanan expects most will align their laws with the IRS guidelines regarding this matter.
“It’s likely we won’t see clear guidance from states on their 2026 requirements until around April or May,” Buchanan noted. “So, we could be waiting a while to see if states change their positions on taxing loan forgiveness or maintain the status quo.”
