Is Student Loan Forgiveness Taxable in 2026? Now It Is Again.

A physical therapist in private practice makes her 240th qualifying payment on an income-based repayment plan in March 2026, and the Department of Education wipes out the $65,000 left on the loan. Nothing arrives in the mail for ten months. Then a Form 1099-C shows up in January with $65,000 in box 2, and the return she expected a refund on shows a $14,564 balance due instead. The forgiveness was real. So is the tax, because the rule that made it tax-free expired on December 31, 2025.

Cancellation of debt has been income since long before student loans existed. IRC §61(a)(11) puts income from the discharge of indebtedness into gross income, and §108 holds the exceptions. For five years one of those exceptions was sweeping. Section 9675 of the American Rescue Plan Act of 2021 rewrote §108(f)(5) to keep out of income the discharge of essentially any student loan, for any reason, where the discharge happened after December 31, 2020 and before January 1, 2026. Notice 2022-1 then told lenders and servicers not to file Form 1099-C on those discharges at all, which is why the subject went quiet for five filing seasons.

The 2025 tax act did not renew it. Section 70119 of Public Law 119-21 replaced the text of §108(f)(5) with a narrow permanent exclusion for loans discharged on a borrower's death or total and permanent disability, extended that exclusion to private education loans, added a Social Security number requirement, and applied all of it to discharges after December 31, 2025. Everything the broad version used to cover fell back to the default rule on January 1, 2026. A bill to restore the exclusion was introduced in December 2025 and has not moved out of committee. I would not plan around it passing.

Two exclusions survive, and both turn on the reason for the discharge rather than its size. Section 108(f)(1) excludes a discharge that happens because the borrower worked a set period in a certain profession for a broad class of employers, which is why Public Service Loan Forgiveness and Teacher Loan Forgiveness stay federally tax-free and always have. The rewritten §108(f)(5) covers death and total and permanent disability. Neither one reaches time-based forgiveness. IBR, PAYE, ICR, and SAVE forgive a balance because payments were made for 20 or 25 years, not because of where the borrower worked, so no provision excludes them. The Repayment Assistance Plan that opened July 1, 2026 forgives at 30 years on the same footing, and nothing in the statute excludes that either.

The amounts are not small. Protect Borrowers puts the average balance canceled through income-driven repayment at $49,697 and estimates that 2 to 3 million borrowers will reach time-based forgiveness over the next decade, with added federal tax of roughly $6,000 to $12,000 each. The discharge also lands in adjusted gross income, which drags in limits that have nothing to do with student loans. Marketplace coverage is the common collision: one year of inflated AGI can force a repayment of the premium tax credit on top of the tax on the discharge itself.

A borrower who crossed the payment threshold in 2025 and is still waiting on paperwork is in better shape than the calendar suggests. In the settlement the Department of Education entered in the American Federation of Teachers litigation in October 2025, it agreed not to file a Form 1099-C for borrowers who became eligible in 2025, even where the discharge itself posts in 2026 or later, provided the conditions of Notice 2022-1 are met. The department treats the date the borrower hit the qualifying payment count as the discharge date for tax purposes. Pull your payment history before you take a 1099-C at face value. A 1099-C reporting a 2026 discharge on a balance that qualified in 2025 is one to dispute with the servicer, not something to fix on the return.

A discharge is not a paycheck. Nothing is taken out of it, it never touches a W-2, and most borrowers first see the number the following January, after every estimated tax deadline for the year has passed. It is the same trap as untaxed side income, where the fix is also setting money aside quarterly. Pay in 90% of this year's tax or 100% of last year's, 110% if your prior-year adjusted gross income was over $150,000, and §6654(d) switches off the underpayment penalty no matter what the return shows. Miss the safe harbor and the addition to tax runs at 7% for the fourth quarter of 2026 under Rev. Rul. 2026-15, compounded daily. The payment for income received between September 1 and December 31, 2026 is due January 15, 2027. I built a safe harbor calculator that turns last year's tax and this year's withholding into the number.

Section 108(a)(1)(B) excludes cancellation of debt income to the extent the taxpayer was insolvent immediately before the discharge, and §108(d)(3) defines insolvency as the excess of liabilities over the fair market value of assets at that moment. The word immediately is doing real work: the student loan is still a liability right up until it is forgiven, which is what puts so many borrowers under water on paper. Assets include everything owned, retirement accounts included, per Publication 4681. A borrower with $65,000 of student debt, a $12,000 car, $3,000 in checking, and $20,000 in a 401(k) is insolvent by $30,000 at that instant, so $30,000 of the discharge comes out of income. Section 108(a)(3) caps the exclusion at the insolvency amount, leaving the other $35,000 taxable. Claim it on Form 982, and expect §108(b) to reduce tax attributes by what you excluded, which for most individuals means loss carryovers and asset basis.

State treatment is a separate question. A state that starts from federal adjusted gross income or federal taxable income picks the discharge up automatically unless its legislature wrote an exclusion, and most have not. Utah starts from federal taxable income, so the same $65,000 adds $2,893 at the state's flat 4.45% rate for 2026 before Utah credits. Check your own state before you treat the federal number as the whole bill.