Forgiven student loan debt may be taxable income, but temporary federal rules have suspended that tax for most borrowers through 2025

When a student loan is forgiven — whether through a federal forgiveness program, income-driven repayment plan, or employer repayment assistance — the forgiven amount is normally treated as taxable income by the IRS. This means you would owe federal income tax on that money as if you had earned it. However, the American Rescue Plan Act of 2021 suspended this tax rule for federal student loan forgiveness through December 31, 2025. After that date, the tax will apply again unless Congress extends the suspension.

The key distinction is between federal loans (which currently have the tax suspended) and private student loans (which do not). State taxes may also apply differently depending on where you live. Understanding which loans you have and when the suspension ends matters for your tax planning.

Key Takeaways

  • Federal student loan forgiveness is not taxable through December 31, 2025, but will become taxable again in 2026 unless Congress extends the suspension.
  • Private student loan forgiveness is taxable now and does not benefit from the federal suspension.
  • Forgiveness through income-driven repayment plans, Public Service Loan Forgiveness, and employer assistance programs all follow the same federal tax rule.
  • Some states tax forgiven student loans even when the federal government does not, so check your state's rules if you live in a state with income tax.
  • You will receive a Form 1099-C from your loan servicer if forgiveness occurs, which you may need to keep for tax records even if you do not owe federal tax.

How the federal tax suspension works

The American Rescue Plan Act suspended the requirement to report forgiven federal student loan debt as taxable income. This applies to forgiveness that occurs between March 27, 2021, and December 31, 2025. If your federal loans are forgiven during this window, you do not report that amount as income on your federal tax return, and you do not owe federal income tax on it.

This suspension covers all types of federal student loan forgiveness: Public Service Loan Forgiveness, income-driven repayment plan forgiveness (after 20 or 25 years of payments), closed school discharge, total and permanent disability discharge, and one-time forgiveness programs. The suspension also applies to forgiveness through employer student loan repayment assistance programs, as long as the loans being forgiven are federal loans.

After December 31, 2025, forgiven federal student loans will become taxable again unless Congress passes new legislation to extend the suspension. This means if your loans are forgiven in 2026 or later, you will owe federal income tax on the forgiven amount.

Private student loans and the tax rule

Private student loans do not benefit from the federal tax suspension. If a private lender forgives your debt — whether through a hardship program, settlement, or any other means — that forgiven amount is taxable income now and will remain taxable. Private loans are not covered by the American Rescue Plan Act suspension because that law applies only to federal student loans.

Private loan forgiveness is less common than federal forgiveness, but it does happen. If you have private loans and the lender agrees to forgive part or all of the debt, you should expect to receive a Form 1099-C and to owe income tax on the forgiven amount. Some private lenders may offer settlement programs where you pay a lump sum to close the account; the difference between what you owe and what you pay is treated as forgiven debt and is taxable.

State income tax on forgiven loans

Even though federal income tax is suspended through 2025, some states tax forgiven student loan debt. State rules vary significantly. A few states have passed their own suspensions or exemptions, while others tax forgiven loans as ordinary income.

States that currently do not tax forgiven federal student loans include California, New York, and several others, but this list changes. States that do tax forgiven loans may require you to report the forgiven amount on your state tax return even if you do not owe federal tax. If you live in a state with income tax, contact your state tax authority or check your state's Department of Revenue website to learn whether forgiven student loans are taxable in your state.

If you move to a different state after your loans are forgiven, you may owe tax in your new state depending on when the forgiveness occurred and that state's rules. This is less common but can happen, so it is worth checking if you relocate.

What happens when you receive a Form 1099-C

When a federal student loan is forgiven, your loan servicer will send you a Form 1099-C (Cancellation of Debt) for tax record purposes. This form reports the amount of debt that was forgiven. Even though you do not owe federal tax on that amount through 2025, you should keep the form with your tax records.

The Form 1099-C is important because it documents the forgiveness for your records and for the IRS. If you are audited, you will want to show that you received this form and that the forgiveness occurred during the tax suspension period. The form will show the date of forgiveness, which determines whether the suspension applies.

You do not need to report the Form 1099-C amount on your federal tax return if the forgiveness occurred during the suspension period (through 2025). However, you may need to report it on your state tax return depending on your state's rules. Keep copies of all Forms 1099-C you receive related to student loan forgiveness.

Planning for 2026 and beyond

If you expect your federal student loans to be forgiven in 2026 or later, you should plan for the possibility of owing federal income tax on that amount. The tax will be calculated based on your tax bracket in the year the forgiveness occurs. For example, if $50,000 in loans are forgiven in 2026 and you are in the 22% tax bracket, you could owe approximately $11,000 in federal income tax.

Some borrowers may want to accelerate forgiveness before the end of 2025 if they are close to reaching forgiveness under an income-driven repayment plan or other program. Others may need to set aside money to cover the tax bill if forgiveness happens after 2025. The exact amount you would owe depends on your income, filing status, and other tax factors in the year forgiveness occurs.

Congress could extend the suspension beyond 2025, but there is no may provide. If you are planning finances around student loan forgiveness, it is reasonable to assume the tax will apply after 2025 unless you see legislation extending the suspension.

Employer student loan repayment assistance

Some employers offer to pay down or forgive employee student loans as a benefit. This forgiveness is treated the same way as other federal student loan forgiveness: it is not taxable through 2025 if the loans being forgiven are federal loans. The employer's payment counts as forgiveness, not as wages or income to you.

If your employer is paying federal student loans on your behalf, make sure you understand whether they are paying the loan servicer directly or reimbursing you. Direct payments to the servicer are clearer for tax purposes. If the employer reimburses you and you then pay the servicer, the mechanics are the same from a tax standpoint, but documentation matters if you are ever audited.

Employer assistance with private student loans is taxable to you as income, similar to other forms of private loan forgiveness. Ask your employer or HR department which type of loans the assistance covers and whether they have guidance on the tax treatment.

Frequently Asked Questions

Will I owe taxes on forgiven federal student loans after 2025?

Yes, unless Congress extends the suspension. Starting January 1, 2026, forgiven federal student loan debt will be taxable income again. The amount you owe in taxes will depend on your tax bracket in the year forgiveness occurs. It is wise to plan for this possibility now if you expect forgiveness after 2025.

Do I need to report the Form 1099-C on my tax return if forgiveness happened in 2024 or 2025?

No, you do not report it on your federal tax return because the forgiveness is not taxable during the suspension period. However, keep the form with your records. You may need to report it on your state tax return depending on your state's rules, so check with your state tax authority.

What if I have both federal and private student loans and only the federal ones are forgiven?

Only the federal loan forgiveness is covered by the tax suspension. If your private loans are forgiven separately, that amount is taxable. If both are forgiven at the same time, the federal portion is not taxable through 2025, but the private portion is taxable.

Does Public Service Loan Forgiveness count as taxable income?

No, not through 2025. Public Service Loan Forgiveness is a federal program, so forgiveness under it is covered by the tax suspension. After 2025, it will become taxable unless the suspension is extended.

Can I deduct the taxes I owe on forgiven student loans?

No. Forgiven student loan debt is treated as income, not as a deductible expense. You cannot offset the tax by deducting the forgiveness amount. Once the suspension ends in 2026, the forgiven amount will simply be added to your taxable income for that year.