Student Loan Forgiveness Tax Shock: What You’ll Actually Owe in 2026

That debt relief might come with a hidden invoice from Uncle Sam.

The Tax Man Cometh

Forgiven debt isn't always free money. For federal student loans, the discharged amount can be treated as taxable income by the IRS. While temporary relief measures have shielded borrowers, that protection has an expiration date.

2026: The Cliff Edge

Current provisions shielding forgiven student debt from federal income tax are set to sunset after 2025. Unless Congress acts, borrowers receiving forgiveness in 2026 could face a significant tax bill on the discharged amount—a classic case of the government giving with one hand and taking back with the other.

Planning for the Phantom Income

This creates a phantom income scenario where your taxable income spikes without actual cash hitting your bank account. It's a brutal bit of financial engineering that could push borrowers into a higher tax bracket. Smart planning now involves estimating potential liability and setting aside funds, because the IRS won't accept 'I already paid for this once' as a valid deduction.

It's the ultimate finance irony: getting rescued from debt only to owe a fee for the rescue. Start running the numbers now, because in the world of personal finance, there's no such thing as a truly free lunch—just deferred payments.

Key Takeaways

• An exemption that made student loan forgiveness tax-free ends in 2025.
• That means borrowers who complete the requirements for forgiveness in 2026 should prepare for a higher tax bill.
• Taxpayers who achieve the requirements for loan forgiveness before 2025 ends, however, will not pay taxes on it, even if their loan discharge is in 2026.

If you expect to have your federal student loans forgiven in 2026, you should check now to see if you'll owe taxes on those funds.

Under a temporary tax rule created during the pandemic, borrowers who became eligible to have their loans discharged under an income-driven repayment plan between 2021 and the end of 2025 were exempt from paying taxes on the discharge of their loans. Eligibility requirements typically included being on an active income-driven repayment plan (Income-Based Repayment, Pay as You Earn, or Income-Contingent Repayment) and making 20 or 25 years of qualifying payments.

Starting in the new year, however, the rules for loan forgiveness will change, and borrowers who qualify for forgiveness in 2026 will have a higher tax bill.

Why This Matters

Borrowers should be aware of whether they will be taxed on any loan forgiveness they receive in 2026, so they can use the year to prepare for a likely significantly higher tax bill.

Borrowers Who Qualified For Forgiveness In 2025

Many borrowers who met all the requirements for student loan forgiveness this year have had their discharge delayed due to ongoing court litigation.

However, when the Department of Education announced in October that it WOULD resume granting loan forgiveness to eligible borrowers, it clarified that any borrower who reaches eligibility in 2025 will not be required to pay taxes on it, even if their forgiveness is processed in 2026.

Student loan borrowers who have reached the requirements for loan discharge in 2025 have recently begun receiving their forgiveness, noted Scott Buchanan, executive director of the Student Loan Servicing Alliance. He expects most of the backlog of borrowers awaiting promised forgiveness to be cleared in the early months of 2026.

"If someone [was] eligible in 2025, they will certainly [get their forgiveness] before tax filing season is really upon us, in March and April for sure," he said.

Since these borrowers became eligible for loan discharge in 2025, they don't have to take any action to receive their tax-free forgiveness. Loan servicers typically handle the processing of student loan forgiveness and notify the IRS when a borrower receives forgiveness. However, servicers have stopped those notifications while forgiveness has been tax-free and will continue to do so for borrowers who reached eligibility in 2025, Buchanan said.

While these borrowers may be relieved of any federal taxes on their forgiveness, some states will still tax it, regardless of when the borrower achieved forgiveness.

Related Education

Borrowers Who Will Recieve Forgiveness In 2026

Borrowers who become eligible for forgiveness in 2026 and beyond will have to pay federal taxes on the amount that was forgiven in the following year.

"You do want to make sure that you are not surprised when you file your return, and all of a sudden you're told, 'Gosh, you need to make another $2,000 in tax payments,'" Buchanan said.

Borrowers who make the total number of payments required for loan discharge in 2026 will receive a 1099-C tax FORM from their loan servicer in January 2027. This form will detail the amount of forgiveness received in 2026. Taxpayers are then required to report this amount as part of their taxable income to the IRS when they file their 2026 tax return in 2027.

Next year, Buchanan said, these borrowers should estimate how the forgiveness will affect their tax bill by determining their effective tax rate, which is based on their tax bracket.

Important

Since loan forgiveness is considered taxable income, it may cause some taxpayers to be taxed in a higher bracket, resulting in a higher tax bill. This could result in a tax bill of thousands of dollars for some students.

What This Means For State Taxes

"Keep in mind that you're not going to have to pay taxes on all of [the loan forgiveness] because you would have other offsetting deductions and things like that that could materially reduce that tax liability," Buchanan said. "I know a lot of the software packages that you can get online...will let you do some estimating of future taxes."

Many states paused taxing student loan forgiveness when the federal government did, as states typically aim to mirror the federal tax code.

It isn't clear whether all states will also revert to taxing forgiveness after the year ends, but Buchanan anticipates that most state tax codes will return to following the IRS's approach to taxing loan discharges.

"I would anticipate that it probably won't be until after April or May that you'll get guidance from states about what the 2026 requirements look like," Buchanan said. "So it may be several months or the middle of the year before we really know if states are changing their positions [on taxing loan forgiveness] or they're keeping them the same."