Key Takeaways
Most student loan forgiveness is now taxable at the federal level. The temporary tax exemption under the American Rescue Plan expired after 2025, meaning forgiveness granted in 2026 or later is generally treated as taxable income unless a specific exception applies.
Certain programs, like Borrower Defense to Repayment, are never taxable under IRS rules, regardless of timing.
State taxes may apply even if federal taxes don’t. Because most states follow IRS rules, borrowers may owe state income tax on forgiven student loans, unless they live in a state without an income tax or one that provides its own exemption.
Is Loan Forgiveness Taxable?
Under federal tax law before 2026, the American Rescue Plan Act of 2021 provided that most forgiven federal student loan debt was not taxable income through the end of 2025. That meant borrowers who received forgiveness under qualifying programs during that period did not owe federal income tax on the amount forgiven.
Starting in 2026, that temporary exemption has lapsed, and the default rule is that forgiven debt is taxable income unless a specific exception applies.
What’s Changed
Under the Trump administration, key changes have affected both eligibility for student loan forgiveness and how it’s taxed. PSLF rules have tightened, and the expiration of the federal tax exemption means forgiven loans may now come with a tax bill.
1. Slower PSLF Processing and Stricter Eligibility
The Trump Department of Education has tightened rules around Public Service Loan Forgiveness (PSLF). It’s reviewing employer eligibility more strictly and slowing application processing. Although PSLF remains a path to forgiveness for qualifying public servants, the administrative environment has become more stringent.
2. Tax Treatment of Forgiveness Has Changed
The temporary federal tax exemption for forgiven federal student loan debt expired on December 31, 2025. That means forgiveness granted in 2026 or later is generally considered taxable income for federal tax purposes unless a specific exception applies.
Non-Taxable Student Loan Forgiveness Programs
Despite the shift in the baseline tax treatment of forgiveness, some discharges continue to be non-taxable by federal law:
- Public Service Loan Forgiveness (PSLF). Since its creation in 2007, Public Service Loan Forgiveness (PSLF) has always been non-taxable under federal law. At this time, it does not appear that the current administration will change the rules regarding this type of student loan forgiveness program.
- Borrower Defense to Repayment. Borrowers who attended schools that misled them or engaged in deceptive practices can seek relief under the Borrower Defense to Repayment Program. In most cases, borrowers will have their loans discharged without needing to take any additional action. The IRS has also taken the position that loans discharged under “Defense to Repayment” are never taxable.
Other programs that were non-taxable through 2025 under the American Rescue Plan may now generate taxable income, absent new legislative changes.
Where Do States Stand?
Generally, states tend to follow the IRS’s tax treatment of forgiven debt. Since most student loan forgiveness is now taxable, it’s likely that you’ll also be facing a tax bill for it at the state level, unless you live in a state that doesn’t have any income tax. It’s always best to check with your state’s department of revenue to verify the treatment of any forgiven student loan debt.
Final Thoughts
The landscape of student loan repayment and forgiveness continues to evolve rapidly. With the end of the SAVE plan, resumption of interest and collections, slower PSLF processing, and the expiration of the tax-free status for most federal loan forgiveness programs, borrowers face a more complex and potentially more costly environment. If you’re navigating repayment or pursuing forgiveness, understanding how these policy changes affect your tax liability is more important than ever.
Tax laws and federal program rules can change, and your individual situation may have nuances that affect your tax outcomes. Consulting with a qualified tax advisor or professional can help you make informed decisions and minimize surprises at tax time.