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 Congress has extended a temporary federal exclusion through at least 2025 under §108(f)(5), with OBBBA extending it further. 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, §108(f)(5) - enacted by the American Rescue Plan and extended by OBBBA - excludes IDR forgiveness from federal income from 2021 through at least 2025. Verify whether the exclusion has been extended for 2026 under current law.
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. Extended by OBBBA through 2025 - verify current extension status.
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) is the temporary COVID-era and OBBBA extension covering IDR forgiveness. 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 receives $50,000 of IDR forgiveness 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.