Will My Student Loan Forgiveness Be Taxed?

Through the end of 2025, no borrowers will pay federal income taxes on any student debt discharged by the federal government.

A provision in the March 2021 COVID-19 relief package stipulates that any debt forgiven from Dec. 31, 2020, to Jan. 1, 2026, will not count as income. Without the provision in place, the amount forgiven under one of the existing forgiveness programs (income-driven repayment), is reported to the IRS as income and taxed according to the borrower’s current tax bracket.

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What your bill could look like without a tax break

Let’s imagine there were no tax breaks. Say you have $10,000 of student loan debt forgiven sometime this year. Your household earnings are $74,000 (the approximate median in the U.S.), which means you fall within the 22% tax bracket. When you pay taxes on 2023 income, the forgiven debt would be taxed at 22%, and you would owe $2,200 on it.

Without a tax break, forgiveness could also have pushed you into a higher tax bracket. Say you earned $89,075 — the high end of the 22% tax bracket — and had $10,000 forgiven, which pushed you into the next bracket. Since it’s a progressive tax system, you would end up paying 22% on your income, but 24% on that amount that spilled over into the higher tax bracket ($2,400 in this example).

Sliding into a different tax bracket could result in loss of credits, such as the earned income tax credit or a child tax credit.

Where student loan cancellation stands

The Supreme Court blocked President Joe Biden’s plan for student loan debt cancellation that was slated to forgive up to $20,000 for Pell Grant borrowers and $10,000 for federal student loan borrowers.

Meanwhile, federal student loan borrowers who received an interest-free payment pause during the pandemic relief resumed payments in October 2023.

The Biden-Harris Administration announced in January 2024 that borrowers enrolled in the newest federal income-driven repayment plan, Saving on a Valuable Education Plan (SAVE), may be eligible for expedited loan forgiveness.

Beginning in February, students who borrowed $12,000 or less for college and have been in repayment for at least 10 years will have their loan forgiven if enrolled in SAVE. This is an accelerated timeline from the original July 2024 date. The Department of Education anticipates nearly 74,000 additional borrowers will receive loan forgiveness.

Borrowers who get loan forgiveness may face income taxes in at least some states, either because state law requires it or because their legislatures have moved to do so.

Existing forgiveness plans and taxes

Although there are existing debt cancellation programs, the success rates and tax implications have varied. Public Service Loan Forgiveness offers tax-free debt cancellation for borrowers who are approved. So does borrower defense to repayment — used if you’ve been defrauded by your school — and disability forgiveness.

Forgiveness is normally taxed for those enrolled in an income-driven repayment plan, which sets payments at a portion of your income and forgives debt after 20 or 25 years.

The income-driven repayment plan account adjustment, previously known as the “IDR waiver,” was announced in 2022. This one-time program retroactively counts additional months of repayment toward income-driven repayment forgiveness for borrowers who were steered into forbearance by their servicers. It also includes borrowers who hadn't consolidated in the direct loan program or who made payments on the wrong type of loan.

The Department of Education estimates the plan will forgive debt for 855,000 borrowers totaling nearly $42 billion. The tax break means any borrowers whose debt is forgiven prior to January 1, 2026, won't face income taxes on the amount discharged.

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