Why this changed for 2026
From 2021 through 2025, the American Rescue Plan Act excluded most forgiven student loan debt from federal taxable income. That exclusion was always temporary, and the One Big Beautiful Bill didn’t extend it, so the pre-2021 default rules apply again to discharges in 2026 and beyond.
What stays tax-free vs. what’s taxable now
| Forgiveness type | 2026 and later |
|---|---|
| Public Service Loan Forgiveness | Tax-free |
| Teacher Loan Forgiveness | Tax-free |
| Discharge due to death or permanent disability | Tax-free |
| Income-driven repayment forgiveness | Taxable |
| Private loan settlements | Taxable |
Source: Internal Revenue Service
Watch for Form 1099-C
If your loan holder cancels $600 or more of debt, you’ll typically receive a Form 1099-C showing the amount discharged. You’re required to report taxable cancellation-of-debt income on your return whether or not you actually receive the form.
Reducing tax on a taxable discharge
If your forgiveness is taxable, you may be able to exclude some or all of it if you were insolvent, meaning your total debts exceeded your total assets, immediately before the discharge.
For example, say your income-driven repayment forgiveness kicks in during 2026, and you have $40,000 forgiven. That $40,000 gets added to your other income for the year and taxed at your ordinary rate. If you were insolvent immediately before the discharge, some or all of that $40,000 might be excludable instead, which is why it’s worth checking your eligibility using Publication 4681’s Insolvency Worksheet before assuming you owe the full amount.
You’ll use Form 982 to report the insolvency exclusion on your tax return.
State taxes may differ
Some states don’t automatically follow federal tax treatment of forgiven student loans, so your state tax bill on the same forgiveness could be different. Check your state’s department of revenue for current guidance.
