Welcome to 2026: Some Student Loan Forgiveness Is Now Taxable
By Hugh T. Ferguson, NASFAA Managing Editor
A change in tax policy for 2026 has created some confusion over how certain forms of student loan forgiveness could now be taxed.
The American Rescue Plan Act (ARP) specified that any student loan debt (federal, institutional, or private) that was modified or discharged from December 31, 2020, through January 1, 2026, is excluded from an individual's income when they file their tax returns.
This provision was incorporated into ARP during a reconciliation process, and to meet budgetary requirements, it was only able to remain in place for a five-year period. It was also implemented while the Biden administration was considering broader efforts to implement student loan debt cancellation that could have resulted in taxable income without this provision. The U.S. Supreme Court ultimately halted that effort to implement broad-scale student loan debt cancellation.
Now that the provision has expired and students are navigating significant changes to the student loan landscape with the One Big Beautiful Bill Act (OBBBA) revising repayment options, efforts to wind down the Saving on a Valuable Education (SAVE) student loan repayment plan, and ongoing legal challenges to the Department of Education’s (ED) processing of loan cancellation forms, borrowers have been left with questions over how their finances could be impacted.
In November, a group of Senate Democrats sent a letter to the Department of the Treasury and the IRS, urging the administration to declare IDR discharge as non-taxable income, warning that some borrowers could face a tax bill as high as $10,000. The senators also outlined the legal authority the administration could use to make the declaration.
Some borrowers will be spared this surprise tax bill due to an ongoing lawsuit in which ED reached a preliminary agreement with the American Federation of Teachers (AFT) that would offer more borrowers a pathway to forgiveness and ensure that eligible applicants are not subject to a tax bill due to processing delays. Per that agreement, the department stated that it will not file a 1099-C for borrowers who have already applied for and qualified for forgiveness but have not had their application processed due to the ED’s backlog, allowing them to waive the new tax penalty when filing taxes after January 1, 2026.
While borrowers in income-driven repayment (IDR) programs, who were not part of the legal agreement between ED and AFT and meet their time-based forgiveness after January 1, 2026, could be impacted by the change in tax policy, it’s important to note that the expiration of this provision does not affect all forms of student loan forgiveness.
These tax changes do not impact forgiveness under the Public Service Loan Forgiveness (PSLF) program, which is not considered taxable income. ED has specified that “According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF or TEPSLF aren’t considered income for tax purposes. For more information, check with the IRS or a tax advisor.”
"NASFAA is relieved to see protections for borrowers who, through no fault of their own, faced Department of Education processing delays that pushed their forgiveness into a taxable year," said Megan Walter, NASFAA senior policy analyst. “The expiration of this provision could saddle many low- and middle-income borrowers on income-driven repayment plans with an unexpected and unaffordable IRS bill after meeting the requirements to have their debt forgiven. NASFAA will continue to advocate for permanent tax-free treatment of all student loan debt forgiven under an income-driven repayment plan."
Publication Date: 1/7/2026
David S | 1/7/2026 9:49:22 AM
Tax on partial student loan forgiveness, courtesy of those who fall over themselves to give tax cuts to billionaires and huge corporations.
The US continues to have the most absurdly complex and cruel student loan system in the world…by design. It’s inexcusable.
Betty W | 1/7/2026 9:21:31 AM
I want to encourage Servicers to contact and inform Student Loan Borrowers of any changes that may affect them.
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