The tax treatment of student loan forgiveness depends entirely on which forgiveness program applies. Public Service Loan Forgiveness is permanently excluded from federal income tax by statute. Income-driven repayment forgiveness after 20 or 25 years would normally be cancellation of debt income - but the temporary federal exclusion under §108(f)(5) applied only to discharges in 2021 through 2025; after 2025, §108(f)(5) excludes only discharges on account of death or total and permanent disability. State treatment varies: many states do not conform to the federal exclusion and tax the forgiven amount as ordinary income. Borrowers who receive forgiveness notices should not assume the amount is tax-free at every level.
Public Service Loan Forgiveness (PSLF): Permanently excluded from federal gross income under IRC §108(f)(1). No income tax, no 1099-C issued by the government. State treatment: most states follow the federal exclusion; verify your state.
Income-Driven Repayment (IDR) forgiveness (SAVE, PAYE, IBR, ICR): Normally taxable as cancellation of debt income under IRC §61. However, the American Rescue Plan version of §108(f)(5) excluded IDR forgiveness from federal income for discharges in 2021 through 2025 only. OBBBA (P.L. 119-21 §70119) did not extend it; for discharges after 2025, §108(f)(5) excludes only discharges on account of death or total and permanent disability, so IDR forgiveness is generally COD income unless another exclusion (such as insolvency) applies.
Employer student loan repayment under §127: Employer payments of up to $5,250 per year on employee student loans are excluded from the employee's income as educational assistance. Made permanent by OBBBA for payments after 2025; the $5,250 limit is indexed for inflation after 2026.
When a lender cancels or forgives a debt, the borrower generally recognizes cancellation of debt (COD) income equal to the forgiven amount under IRC §61(a)(12). The lender reports the forgiven amount on Form 1099-C. The borrower includes the amount in gross income for the year forgiveness occurs. This general rule applies to any debt forgiveness - credit cards, mortgages, business loans, and student loans - unless a specific exclusion applies.
For student loans specifically, the exclusions under §108(f) are the operative provisions. §108(f)(1) excludes forgiveness under qualified forgiveness programs for PSLF and state-sponsored programs. §108(f)(5) formerly held the temporary COVID-era exclusion for IDR forgiveness (2021 through 2025); since OBBBA it covers only discharges on account of death or total and permanent disability. Outside these specific exclusions, forgiven student loan balances are taxable income.
Several states do not conform to the federal §108(f)(5) IDR exclusion - either because they use static conformity (their IRC reference date predates the federal change) or because they specifically decoupled. States that have taxed IDR forgiveness or taken non-conformity positions include: California (has conformity questions - verify FTB guidance), North Carolina (taxed IDR forgiveness), Indiana, and Mississippi. A borrower who received $50,000 of IDR forgiveness in 2021 through 2025 (excluded federally) may owe state income tax in their state on the full $50,000 at their state's rate.
If forgiven student loans do not qualify for the §108(f) exclusions, the insolvency exclusion under §108(a)(1)(B) may still apply. A taxpayer who is insolvent immediately before the forgiveness - meaning total liabilities exceed total assets - can exclude COD income to the extent of the insolvency. A borrower with $200,000 in forgiven loans who had $250,000 in liabilities and $100,000 in assets at the time of forgiveness is insolvent by $150,000 - excluding up to $150,000 of COD income. The remaining $50,000 would be taxable. Form 982 is used to claim the insolvency exclusion.