Student Loan Forgiveness Might Cost You More Than You Think – Here’s Why

If your student loans are forgiven, you might think that’s the end of it. But could you still owe taxes on the canceled debt? The answer depends on when your loans are forgiven, which program you qualify for, and where you live.

Here’s what you need to know.

Will You Owe Federal Taxes on Forgiven Loans?

For now, most student loan forgiveness is NOT taxed at the federal level—but that could change soon.

In 2021, the American Rescue Plan Act (ARPA) made forgiven student loan debt tax-free until December 31, 2025. This means that if your loans are canceled before that date, you won’t have to pay federal taxes on the amount forgiven.

However, unless Congress extends this rule, student loan forgiveness could become taxable again in 2026.

For example, if $30,000 of your loans are forgiven in 2026 and the IRS counts it as taxable income, that $30,000 could be added to your earnings for the year. If you’re in the 22% tax bracket, you’d owe an extra $6,600 in federal taxes.

Will You Owe State Taxes?

Even though the federal government isn’t taxing student loan forgiveness right now, some states still do.

Most states follow federal tax laws, but a few have their own rules and still count forgiven loans as taxable income.

As of 2024, these states may tax certain types of student loan forgiveness:

• Arkansas – Taxes most forgiven loans, except for PSLF and disability discharge.
• Indiana – All forgiven loans are taxed unless part of PSLF, Teacher Loan Forgiveness, or disability discharge.
• Mississippi – Forgiven loans are taxable unless canceled under special programs like the CARES Act.
• North Carolina – Forgiven loans are taxed unless canceled due to death, disability, or bankruptcy.
• Wisconsin – Most forgiven loans are taxed unless canceled under PSLF or due to death or disability.

If you live in one of these states, check your local tax laws to see if you’ll owe anything.

What If Biden’s Loan Forgiveness Plan Is Blocked?

Millions of borrowers were expecting relief under President Biden’s student loan forgiveness plan, which aimed to cancel up to $20,000 per borrower. However, a federal appeals court permanently blocked the plan, meaning many borrowers won’t see that relief.

That said, some existing loan forgiveness programs are still available, including:

• Public Service Loan Forgiveness (PSLF) – Cancels loans for government and nonprofit workers after 10 years of payments.
• Income-Driven Repayment (IDR) Forgiveness – Forgives remaining loan balances after 20–25 years of payments.
• Teacher Loan Forgiveness – Cancels up to $17,500 in loans for teachers in low-income schools.

These programs are still tax-free at the federal level until at least 2025, but some states may still tax the forgiven amount.

How to Avoid a Surprise Tax Bill

If you’re expecting student loan forgiveness, here’s how to avoid a tax shock:

1. Check Your State’s Tax Rules – Some states tax forgiven loans, so visit your state’s tax website or talk to a tax professional.
2. Plan for 2026 and Beyond – If your loans will be forgiven after 2025, be ready for possible federal taxes unless the exemption is extended.
3. Save Money Just in Case – If your loan forgiveness could be taxed, start setting aside money now so you’re not caught off guard later.
4. Stay Informed – Congress could extend the tax break, so keep an eye on student loan news and IRS updates.