For five years, almost every federal student loan discharge was free of federal income tax. That ended on December 31, 2025. Now the type of discharge you get decides whether the IRS treats the cancelled balance as income. Some programs are still fully tax-free. Others can bring a Form 1099-C and a bill of several thousand dollars. Here is what is taxable in 2026, what is not, and how to plan.
The general federal rule is that cancelled debt counts as income unless a law says otherwise. Here is how the main federal student loan programs line up for discharges in 2026:
| Type of discharge | Federal income tax in 2026 | Why |
|---|---|---|
| Public Service Loan Forgiveness (PSLF) | Not taxable | Excluded under Internal Revenue Code section 108(f)(1), which covers loans cancelled for working a set time in certain jobs. The Taxpayer Advocate Service confirms PSLF does not create a tax bill. |
| Teacher Loan Forgiveness | Not taxable | Also listed by the Taxpayer Advocate Service as a discharge that does not create a tax liability. |
| Total and permanent disability (TPD) or death | Not taxable, with a new Social Security number rule | The One Big Beautiful Bill Act made this exclusion permanent for discharges after December 31, 2025. You must include a valid Social Security number on your tax return to claim it. |
| Borrower Defense to Repayment | Not taxable | IRS Revenue Procedure 2020-11 says a federal loan discharged through Borrower Defense is not gross income and should not be reported on your return. |
| Closed school discharge | Not taxable | The same IRS guidance says federal closed school discharges are not gross income. |
| Income-driven repayment cancellation (IBR, PAYE, ICR) | Generally taxable if discharged in 2026 or later | The American Rescue Plan exclusion covered discharges only through December 31, 2025. There is an exception for borrowers who became eligible in 2025 (see below). |
| Repayment Assistance Plan (RAP) cancellation after 30 years | Generally taxable under current law | No federal exclusion covers it today. Advocates have asked Congress to change that, but nothing has passed. |
This page covers federal income tax on federal student loans. It is general information, not tax advice.
The American Rescue Plan Act of 2021 excluded most student loan discharges from federal income if they happened after December 31, 2020 and before January 1, 2026 (IRS Publication 4681). That covered loans cancelled through income-driven repayment, which had been taxable before 2021.
When Congress passed the One Big Beautiful Bill Act in July 2025, it did not extend that broad exclusion. It did make one exclusion permanent: discharges because of the student's death or total and permanent disability, for discharges after December 31, 2025. It also added a requirement that your tax return include a Social Security number that is valid for work to claim it (26 U.S.C. 108(f)(5)).
So in 2026, programs with their own tax rule stay tax-free, and income-driven cancellations went back to being taxable.
Both are tied to working in certain jobs for a set time, and that kind of cancellation is excluded under section 108(f)(1) of the tax code. The Taxpayer Advocate Service lists Public Service Loan Forgiveness and Teacher Loan Forgiveness as discharges that do not create a tax liability. See our pages on PSLF help and Teacher Loan Forgiveness vs. PSLF.
A TPD discharge stays federally tax-free, now permanently, as long as your return includes your Social Security number. Lenders are not required to issue a Form 1099-C for these discharges. If you are approved through the Social Security route, read about the 3-year monitoring period too.
IRS Revenue Procedure 2020-11 says borrowers whose federal loans are discharged through Borrower Defense or the closed school process will not recognize gross income and should not report the discharged amount on their federal return. The IRS also said it will not require lenders to file a 1099-C for these discharges. That covers relief under the Sweet v. McMahon settlement as well. If your school misled you or shut down, see our Borrower Defense guide and our comparison of closed school discharge vs. Borrower Defense.
Other discharge types, such as false certification or unpaid refund discharges, are not named in that IRS guidance, so confirm how yours will be treated with a tax professional.
The big one is the cancellation at the end of an income-driven repayment plan. Under Income-Based Repayment (IBR), PAYE, or original ICR, any balance left after 20 or 25 years of qualifying payments is cancelled. If that happens in 2026 or later, the amount is generally taxable as ordinary income, and you may receive a Form 1099-C (Taxpayer Advocate Service, March 23, 2026).
The new Repayment Assistance Plan (RAP) cancels any remaining balance after 360 qualifying payments, or 30 years. No federal exclusion covers that cancellation under current law, so it would generally be taxable too.
Many borrowers reached their payment count in 2025 but waited months for the paperwork. Under an October 2025 court order in AFT v. Department of Education, the Department uses the date you became eligible as the effective discharge date for IBR, PAYE and original ICR. It agreed not to file a Form 1099-C for borrowers who became eligible in 2025 when the conditions in IRS Notice 2022-1 are met. The order also covers borrowers who reached eligibility under SAVE, applied to move to IBR, PAYE or ICR by December 31, 2025, and were approved in 2026.
A taxable discharge is added to your income for the year, which can push you into a higher bracket. Higher Ed Dive reported that Protect Borrowers, an advocacy group, estimated the next federal tax bill for borrowers whose loans are cancelled through income-driven plans in 2026 could rise by roughly $6,000 to $12,000, with low and middle income borrowers seeing the sharpest increases. A discharge processed in 2026 goes on your 2026 return, filed in 2027.
If your discharge is taxable, the lender may send a Form 1099-C in January or February of the next year. Check the amount and the date against your discharge letter. If something is wrong, ask the issuer to correct it.
You may still owe less than you fear. If your total debts were more than the fair market value of everything you owned right before the discharge, you may be able to exclude some or all of the cancelled amount as insolvent by filing IRS Form 982. Keep records of your debts and assets as of the discharge date. A tax professional can run the numbers with you.
State tax is a separate question. Many states follow federal tax rules automatically, so a discharge that is taxable federally may be taxable in your state as well, and a few states have their own rules. Check with your state department of revenue.
Two borrowers with the same balance can end up with very different tax results. Someone who waits out 25 years of IBR may get a taxable cancellation. Someone whose school misled them may qualify for Borrower Defense, which the IRS treats as tax-free, and may also get payments refunded. Someone in public service may reach Public Service Loan Forgiveness in 10 years, tax-free. That is why it pays to check every program you may fit before you count on an income-driven cancellation.
Borrower Defense claims with thin evidence are likely to be denied, and no program is guaranteed. If your loans are in default, they need to be out of default before they can move to an income-driven plan. Legal Touch handles default resolution by consolidation for a $495 flat fee. Loan rehabilitation is also an option, and it is free through the Department of Education's Default Resolution Group at 1-800-621-3115. See rehabilitation vs. consolidation to compare.
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It depends on the type of discharge. Public Service Loan Forgiveness, Teacher Loan Forgiveness, disability and death discharges, Borrower Defense, and closed school discharges stay federally tax-free. Loans cancelled at the end of an income-driven repayment plan in 2026 or later are generally taxable, because the American Rescue Plan exclusion ended on December 31, 2025.
The American Rescue Plan Act of 2021 excluded most student loan discharges from federal income for discharges after December 31, 2020 and before January 1, 2026. Congress did not extend that broad exclusion. The One Big Beautiful Bill Act kept only the disability and death exclusion, and made that one permanent.
Probably not on the federal side. Under an October 2025 court order in AFT v. Department of Education, the Department uses the date you became eligible as the effective discharge date for IBR, PAYE and original ICR, and agreed not to file a Form 1099-C for borrowers who became eligible in 2025 when the conditions in IRS Notice 2022-1 are met.
A taxable discharge counts as income in the year the debt is cancelled. A discharge processed in 2026 is reported on your 2026 federal return, which you file in 2027. You may receive a Form 1099-C in January or February of the following year.
It depends on your income, filing status and the amount cancelled. Protect Borrowers, an advocacy group, estimated that borrowers whose loans are cancelled through income-driven plans in 2026 could see their next federal tax bill rise by roughly $6,000 to $12,000. Your own number can be higher or lower.
Possibly. If your total debts were more than the fair market value of everything you owned right before the discharge, you may be able to exclude some or all of it as insolvent by filing IRS Form 982. A tax professional can tell you whether this applies to you.
For discharges after December 31, 2025, the federal exclusion only applies if your tax return includes a valid Social Security number. Lenders are not required to issue a Form 1099-C for these discharges, but keep your discharge letter in case the IRS asks.
State rules vary. Many states follow federal tax rules automatically, so an IDR cancellation that is taxable federally may be taxable in your state too, and a few states have their own rules even for programs that are tax-free federally. Check with your state department of revenue or a tax professional.
No. Legal Touch is not a law firm or a tax preparer. We review your loans, find the discharge programs that may fit, and handle the applications for you. For your tax return, talk with a qualified tax professional.
Find out which tax-free discharge programs may fit your loans before you count on a taxable one. Check My Eligibility or call 800-261-2946.
Questions first? Contact our team.
Sources: Taxpayer Advocate Service, tax tip on student loan cancellation and taxes (March 23, 2026); IRS, Publication 4681; IRS, Revenue Procedure 2020-11; 26 U.S.C. 108 as amended by Public Law 119-21, Sec. 70119; U.S. District Court for the District of Columbia, order in AFT v. Department of Education (October 2025); Higher Ed Dive on the Protect Borrowers estimate; IRS, Form 982.
Legal Touch is not a law firm or a tax preparer and does not give legal or tax advice. Results are not guaranteed. Every decision is made by the U.S. Department of Education or your loan servicer, and Legal Touch is not affiliated with any government agency. You can apply for these programs yourself, for free, at StudentAid.gov. We will never ask for your StudentAid.gov username or password.
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