Tax-Free Student Loan Forgiveness Expires In 2026, Who Owes More Next Year?

Federal tax bills on most student loan forgiveness will return in 2026, ending a five-year window of tax-free relief and raising the risk of a student loan tax bomb for borrowers whose balances are wiped out after Dec. 31, 2025.

Pandemic Relief Law's Temporary Tax Break Sunsets

The American Rescue Plan Act of 2021 temporarily made almost all federal and many private student loan discharges tax-free from 2021 through 2025, reversing the usual rule that canceled debt counts as taxable income. Starting Jan. 1, 2026, forgiven balances under most income-driven repayment plans will again be treated as income for federal tax purposes unless Congress acts.

Millions In Income-Driven Plans Face Tax Shock

That change matters for millions of long-term borrowers. Federal Student Aid data from August this year shows that more than 12.7 million Direct Loan and Federal Family Education Loan borrowers are enrolled in income-driven repayment, which ties monthly payments to income and offers forgiveness after 20 or 25 years.

Bankrate experts note that if their forgiveness date falls on or after Jan. 1, 2026, the IRS will likely send a Form 1099-C and borrowers may owe thousands of dollars in one-time taxes.

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By contrast, Public Service Loan Forgiveness and Teacher Loan Forgiveness remain tax-free under separate federal rules and while the American Rescue Plan's special break for death and disability discharges also expires in 2025, the Trump administration's One Big Beautiful Bill made those discharges permanently exempt from federal income tax, according to administration officials.

The stakes are large. Americans owe about $1.66 trillion in federal student loans across 42.5 million borrowers, education data show. Biden-era actions already erased roughly $180 billion in federal student debt for nearly 5 million people, mostly through fixes to Public Service Loan Forgiveness and income-driven plans.

More recently, the Trump administration agreed to resume forgiveness for about 2.5 million borrowers and confirmed that "borrowers will not face tax bills on forgiven balances through 2025."

Borrowers Urged To Prepare Before 2025 Deadline

Borrowers eyeing forgiveness can't change federal tax law, but they can prepare. Experts at Bankrate urge them to confirm their projected forgiveness date with servicers, monitor whether relief arrives before year-end 2025 and check whether their state taxes forgiven debt.

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