IRC §108 · ARPA §9675 sunset 2025-12-31 · Form 982
Student Loan Taxes in 2026 — After ARPA
The federal exclusion that made most student loan forgiveness tax-free from 2021 through 2025 expired on December 31, 2025. Starting in 2026, IDR forgiveness may create cancellation-of-debt income. Here is the current federal framework — program-specific exclusions, §108 insolvency, RAP, and the §127 employer benefit that OBBB made permanent.
Most pre-2026 articles are now wrong.
If a page says "student loan forgiveness is tax-free through 2025" and doesn't flag the sunset, it hasn't been updated. The default federal treatment reverted on January 1, 2026. A particular discharge can still qualify for another exclusion.
The core rules, at a glance
| Program / benefit | 2025 | 2026 |
|---|---|---|
| IDR forgiveness processed after 2025 | Tax-free (ARPA §9675) | Generally cancellation-of-debt income unless another exclusion applies |
| PSLF (§108(f)(1)) | Tax-free | Tax-free |
| Teacher Loan Forgiveness | Tax-free | Tax-free |
| Death / TPD discharge | Tax-free | Tax-free if an SSN is on the return |
| §108(a)(1)(B) insolvency | Available (Form 982) | Available (Form 982) |
| §127 employer repayment | $5,250/yr excluded | $5,250/yr — permanent (OBBB) |
| §221 student loan interest | Up to $2,500 | Up to $2,500 |
The §108(a)(1)(B) insolvency escape hatch
If a discharge is otherwise includible, the insolvency exclusion may apply. If your liabilities exceed the fair market value of your assets immediately before the discharge, the excess is excludable from income:
Measure the balance sheet immediately before the discharge and follow the Publication 4681 insolvency worksheet. An exclusion under §108(a) is reported on Form 982 and can require reduction of tax attributes; the worksheet and current instructions govern which assets, liabilities, and amounts enter the computation.
Why a flat-rate estimate is incomplete
A lump-sum discharge stacks on top of your regular income and often pushes you into higher brackets — but any includible cancellation-of-debt amount becomes one input to the whole return. Taxable income is not the same as AGI, preferential-rate income can change the tax computation, credits and other taxes may change, and an exclusion may require Form 982. A marginal-rate multiplication is therefore not a return-level result.
Use the Student Loan Forgiveness Tax Calculator for a bracket-aware federal estimate.
What OBBB actually changed for student loans
- RAP became available July 1, 2026. It uses a 360-payment maximum period, but eligibility and available alternatives depend on loan date and type. Existing borrowers are not all automatically moved into RAP.
- §127 employer repayment is now permanent at $5,250/year — no more scheduled sunset.
- OBBB did not extend ARPA §9675. Absent new legislation, IDR forgiveness is generally governed by the cancellation-of-debt rules for discharges after 2025, subject to any program-specific or §108 exclusion that applies.
A quick word on states
Federal law is only half the picture. State conformity and state-specific exclusions can differ and change by tax year. Check the applicable state revenue department and return instructions; this page makes no state-by-state classification.
FAQ
Is student loan forgiveness taxable in 2026?
A student-loan discharge after December 31, 2025 may create federal cancellation-of-debt income. IDR forgiveness is generally taxable unless a separate exclusion applies. The answer depends on the discharge date and program; PSLF, qualifying teacher-loan forgiveness, and qualifying death or total-and-permanent-disability discharges have separate federal exclusions (for death and disability discharges after 2025, only if your return includes your work-valid Social Security number).
Do I still owe tax if I was insolvent when the loan was forgiven?
The §108(a)(1)(B) exclusion can apply up to the amount by which liabilities exceeded the fair market value of assets immediately before the discharge, limited by the eligible canceled debt. Form 982 and its tax-attribute rules still apply; use the Publication 4681 worksheet and current Form 982 instructions rather than relying only on a balance-sheet subtraction.
Is PSLF still tax-free after 2025?
Yes. PSLF is excluded by IRC §108(f)(1), which is separate from the ARPA §9675 rule that just expired. Teacher Loan Forgiveness (also §108(f)(1)) also remains federally tax-free. Death and total-and-permanent-disability discharges after 2025 stay excluded under §108(f)(5) only if your return includes your Social Security number (one valid for work, issued by the return's due date); an ITIN does not qualify.
What is the OBBB RAP plan and does it change the tax rules?
P.L. 119-21 made RAP available beginning July 1, 2026. It does not automatically convert every existing borrower to RAP: plan availability depends on loan dates and types, and existing borrowers have transition choices. A balance discharged after RAP's maximum repayment period would follow the cancellation-of-debt rules in effect in the discharge year, which could change before a 30-year horizon is reached.
Can my employer still pay off my loans tax-free?
A qualifying written §127 educational-assistance program can exclude up to $5,250 in 2026 for all covered educational assistance combined, including qualifying student-loan principal or interest. P.L. 119-21 made the student-loan provision permanent and provides inflation adjustments beginning after 2026.
Can I still deduct student loan interest?
Yes — up to $2,500 per year as an above-the-line deduction, subject to the AGI phase-outs. This rule did not change. Claim it on Schedule 1.
Do states tax forgiven student loans in 2026?
State treatment depends on the discharge year, the state's conformity law, and any state-specific exclusion. This federal guide does not classify the states; verify the return-year rule with the applicable state revenue department.
Related
- Student Loan Forgiveness Tax Calculator
- Schedule 1 Guide — where §221 interest deduction sits
- Estimated Tax Penalty Calculator
- IRS Payment Plan Guide
Sources & References
Primary references used for this content
Canceled Debt — Is It Taxable or Not?
IRS explainer covering discharged debt including student loans.
View on irs.gov
Canceled Debts, Foreclosures, Repossessions, and Abandonments
The insolvency worksheet and Form 982 walkthrough.
View on irs.gov
26 U.S.C. §108 — Income from discharge of indebtedness
Current statute: insolvency, qualifying service programs, death/disability, and student-loan discharge provisions.
View on law.cornell.edu
About Form 982 — Reduction of Tax Attributes
How to claim the insolvency exclusion.
View on irs.gov
26 U.S.C. §127 — Educational assistance programs
$5,250 employer student-loan repayment exclusion, permanent under OBBB.
View on law.cornell.edu
American Rescue Plan Act §9675 — text
The 2021-2025 discharge exclusion that expired 12/31/2025.
View on congress.gov
The Repayment Assistance Plan in P.L. 119-21
RAP availability, loan eligibility, payment mechanics, and 360-payment maximum period.
View on congress.gov
✓7 primary sources; links re-checked on a weekly rotation by the source watcher
Disclaimer: This calculator provides estimates for educational purposes only. Not tax, legal, or financial advice. Results may vary based on your specific circumstances. Consult a qualified CPA or tax professional for personalized guidance.