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Student loan forgiveness can offer a financial reset – but starting in 2026, there may be associated tax liabilities. Depending on when and how your loans are forgiven, you may face an unexpected tax bill.
Here’s what you should know:
If your federal student loan balance is forgiven under an income-driven repayment plan in 2026 or later, the amount forgiven is generally treated as taxable income, known as cancellation of debt income. That means you may receive a Form 1099-C, Cancellation of Debt from the lender in January or February the following year, and you must report the amount on your tax return for the year in which the debt was canceled.
Although the American Rescue Plan Act excluded most federal student loan forgiveness from taxable income, it is applicable only if your student loans were forgiven after December 31, 2021, and on or before December 31, 2025.
For example, if the loan forgiveness is processed in 2026, you will need to report it on your 2026 Form 1040 during the 2027 filing season.
Large loan forgiveness can create large tax liabilities: For some borrowers, student loan forgiveness can relieve tens or even hundreds of thousands of dollars of debt. However, forgiven student loan debt is generally taxed at ordinary income tax rates, which can lead to a large tax bill and a higher tax bracket. If you are expecting loan forgiveness in 2026 and beyond, consider advance planning – increase withholdings, make estimated payments, or set aside savings.
Not all loan forgiveness is taxable: Whether loan forgiveness creates a tax liability or not depends on the timing and type of loan forgiveness. If you received notification in 2025 that your loan is eligible for forgiveness, you may not have a tax liability, even if the loan forgiveness was not fully processed until 2026.
Certain types of loan forgiveness, such as Public Servant Loan Forgiveness, Teacher Loan Forgiveness, and discharges due to death or total and permanent disability do not create a tax liability. You may be able to exclude some or all of your forgiven debt from taxable income by filing Form 982 if you were insolvent (i.e., your total liabilities exceed the total fair market value of your assets) at the time your debt was forgiven.
Record keeping is critical: When you receive Form 1099-C, review it carefully. Keep detailed financial records on your financial situation at the time of discharge.
Taxpayer Advocate Service is Here to Help: As always, Taxpayer Advocate Service is available to assist qualifying taxpayers who face financial hardships.