Taxes on Student Loan Forgiveness: What Will I Owe?

For many student loan borrowers, 2023 was a good year. After more than three years of no payments or interest on federal student loans, the Biden-Harris administration approved a total of 3.6 million borrowers for nearly $132 billion in loan forgiveness.

If you happen to be one of those 3.6 million people, you might be wondering if you have to pay taxes on student loan forgiveness. While canceled debt is usually taxable income, chances are you don’t have to worry about paying taxes for now — at least not on your federal tax return.

Here’s what you need to know.

Temporary changes to tax rules for 2024

Some recent changes to tax laws could impact your tax filings if you had student loan debt forgiven in the past year or hope to in the near future.

The American Rescue Plan Act of 2021 made forgiven student loan debt exempt from federal income taxes between Jan. 1, 2021, and Dec. 31, 2025. This means if you have student loan debt forgiven or discharged during this time frame, you won’t owe federal income taxes on the amount forgiven.

However, some states may still count forgiven or discharged student loan debt as taxable income. According to the Tax Foundation, Indiana, North Carolina, and Mississippi have announced they will tax forgiven student loan debt. Some states have specifically stated they will not tax student loan debt, and the decision is still up in the air in some states. 

Will I have to pay taxes on student loan forgiveness?

Typically, the IRS considers forgiven debt to be taxable income because it’s a financial gain. However, forgiven federal student loan debt is currently not taxable through the end of 2025. Loans forgiven in 2026 and beyond may be taxable, depending on the type of forgiveness program you qualify for (and assuming lawmakers don’t extend the moratorium). 

For example, amounts forgiven under income-driven repayment (IDR) plans, such as Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR), will all be subject to federal taxes starting in 2026. 

Loans forgiven under Public Service Loan Forgiveness (PSLF), the borrower defense to repayment, and the closed school discharge programs aren’t considered taxable income, so you won’t owe federal income taxes on them even after the current rules expire. 

Other exceptions to cancellation of debt income include:

• Debt canceled in a Title 11 bankruptcy case
• Debt canceled to the extent you’re insolvent (meaning your debts exceed your assets)

Certain states will impose income tax on forgiven or discharged federal student loans. Make sure to check your state’s tax laws to see if this applies to you. 

What your tax bill could look like

Without a tax break, the rate you’ll pay on your forgiven debt depends on your tax bracket. 

For example, let’s say you’re in the 22% tax bracket and have $50,000 of student loan debt forgiven. This doesn’t mean you’ll owe $11,000 ($50,000 x 22%) in federal income taxes, because tax brackets don’t apply a single tax rate to all of your income. Instead, they’re tiered, and each income tier gets taxed at a slightly higher marginal tax rate.

Based on the 2024 tax brackets for single filers, you would owe:

• 10% on the first $11,600 of income: $1,160
• 12% on the next $35,550 of income: $4,266
• 22% on the last $2,850 of income: $627

Your total tax bill on the $50,000 of canceled student loan debt would be $6,053.

Plan for taxes on forgiven student debt

Many borrowers don’t realize their forgiven student loan debt may be taxable until they file their tax returns and get stuck with a big tax bill or don’t get the refund they were expecting. The surprise tax bills are often referred to as “student loan tax bombs,” and can cause financial difficulties if you don’t plan for them.

If you’re worried you might be on the hook for an incoming tax bomb, there are a few steps you can take:

• Research your loan forgiveness program rules: Look up the loan forgiveness program your debt was canceled under on the U.S. Department of Education’s Federal Student Aid website. The website has a lot of information on the tax consequences of different loan forgiveness programs.
• Work with a tax professional: If the details still aren’t clear, work with a tax professional who is familiar with the laws in your state. They can help you determine whether your loan forgiveness qualifies for an exception and whether student loan debt forgiveness is taxable in your state.
• Plan to pay the tax due: If you’re responsible for paying taxes on your canceled debt, start setting aside the cash to do so. Pay as much as you can when you file your tax return to minimize underpayment penalties and interest, and apply for an IRS payment plan for the remaining balance. If you request a payment plan online and can pay off the balance in 180 days or less, there’s no setup fee.

Taxes on forgiven private student loans

Private student loans don’t qualify for federal forgiveness programs, but some private lenders do offer loan discharge options for situations like disability and death. 

The good news is that the American Rescue Plan Act also exempts canceled private student loan debt from federal income tax. However, this may not extend to state taxes where forgiven debt might still be taxable. It’s a good idea to consult a tax professional to understand your unique tax situation.