Borrowers who receive student loan forgiveness after December 31, 2025, face the prospect of owing federal income tax on the discharged amount. The temporary exclusion created by Section 9675 of the American Rescue Plan Act of 2021, which shielded qualifying loan discharges from being counted as gross income, expires at the end of this year. Unless Congress acts to extend or replace that provision, any student debt canceled in 2026 will revert to its pre-pandemic tax treatment, potentially adding thousands of dollars to a borrower’s tax bill.
How the ARPA exclusion changed the tax math for borrowers
Before the pandemic, the IRS generally treated forgiven debt as taxable income. If a borrower had $30,000 in student loans discharged through an income-driven repayment plan, that amount could be added to their adjusted gross income for the year, pushing them into a higher bracket and generating a sizable tax liability. The American Rescue Plan Act of 2021, signed into law as Public Law 117-2, changed that calculus by adding a new subsection to the Internal Revenue Code. Specifically, it created IRC Section 108(f)(5), a temporary provision excluding qualifying student loan amounts discharged after December 31, 2020, and before January 1, 2026, from a borrower’s gross income.
That five-year window gave borrowers enrolled in programs like income-driven repayment plans a clear financial benefit. When their remaining balances were forgiven during the covered period, they owed nothing extra to the IRS. The provision also simplified reporting for loan servicers. Under IRS Notice 2022-01, published in Internal Revenue Bulletin 2022-02, applicable entities were told not to file Form 1099-C for student loan discharges that fell under the Section 108(f)(5) exclusion. Without a 1099-C, borrowers had no cancellation-of-debt income to reconcile on their returns.
The Taxpayer Advocate Service, an independent organization within the IRS, has warned borrowers directly that starting in 2026, tax liabilities tied to loan forgiveness may return. The agency’s guidance states that the ARPA exclusion applies only to loans forgiven after December 31, 2020, and on or before December 31, 2025. Any discharge that occurs even one day later falls outside the protected window.
What the statute and IRS instructions confirm about the expiration
The statutory text leaves little room for ambiguity. Under Section 108 of the Internal Revenue Code, the general rule treats income from the discharge of indebtedness as part of gross income unless a specific exclusion applies. The ARPA-created subsection (f)(5) is one such exclusion, but it carries a hard sunset date. Once the calendar turns to January 1, 2026, that subsection no longer shields borrowers.
Current IRS filing instructions reinforce the same timeline. The agency’s guidance for Forms 1099-A and 1099-C, set out in the official instructions, explicitly notes that the Section 108(f)(5) exclusion expires on December 31, 2025. After that date, lenders and servicers will once again be required to report discharged student loan amounts on Form 1099-C, and borrowers will need to include those amounts as income when filing their federal returns. That means a future forgiveness event could create a tax bill even if the borrower never receives any cash in hand.
The Congressional Research Service, in its nonpartisan analysis of federal student loan forgiveness and repayment programs, has cataloged the types of forgiveness affected by the expiration. Programs covered by the temporary exclusion include discharges under income-driven repayment plans, Public Service Loan Forgiveness, and certain other federal programs. The CRS report identifies IRC Section 108(f)(5) as the specific provision governing the tax treatment of these discharges during the ARPA window, covering loans forgiven after December 31, 2020, and before January 1, 2026.
For borrowers nearing the end of a 20- or 25-year income-driven repayment term, the timing of their discharge date is now a high-stakes variable. A forgiveness event processed in late December 2025 would be tax-free under current law. The same event processed in early January 2026 would generate a potentially large tax bill. In some cases, the tax liability could be large enough to require an installment agreement or other payment arrangement with the IRS.
Unresolved questions and what borrowers should track
No legislation currently on track in Congress would extend the ARPA exclusion past its December 31, 2025, expiration. Bills have been introduced in prior sessions to make the exclusion permanent, but none advanced far enough to become law. Whether the current Congress will take up the issue before the deadline is an open question with no clear answer as of mid-2026 planning cycles. Borrowers and advocates watching the issue will need to monitor any tax or budget packages where an extension could be attached.
A separate area of uncertainty involves which borrowers will actually see forgiveness processed during the transition period. The Department of Education’s timeline for processing income-driven repayment discharges has shifted repeatedly in recent years. Borrowers whose accounts are approaching eligibility may not be able to control the exact date their servicer completes a discharge, even if they submit all required paperwork promptly. That lack of control could determine whether the forgiven amount is tax-free or taxable.
Another unresolved question is how state tax systems will respond once the federal exclusion expires. Some states conform closely to federal definitions of income, while others decouple from specific provisions. During the ARPA window, many borrowers effectively received both federal and state relief on forgiven amounts, but that alignment may not continue uniformly after 2025. Borrowers may need to review their own state’s conformity rules or consult a tax professional to understand potential state-level consequences.
Tax planning will become more important for borrowers who expect forgiveness after the sunset date. Those anticipating a discharge in 2026 or later may want to estimate the potential taxable amount and consider whether they can adjust withholding or make quarterly estimated payments to avoid underpayment penalties. For some, it may be prudent to set aside savings in advance, particularly if their projected forgiveness is large relative to their annual income.
Borrowers who are far from forgiveness milestones have less immediate exposure to the 2025 deadline, but they are still affected by the broader policy uncertainty. If Congress later chooses to reinstate or replace the exclusion, it could change the long-term tax assumptions built into income-driven repayment plans. Until lawmakers act, however, the default assumption must be that the ARPA exclusion ends on schedule and that standard cancellation-of-debt rules will apply thereafter.
In the meantime, experts emphasize a few practical steps. Borrowers should confirm which repayment plan they are in, how many qualifying payments they have made, and when they are projected to reach forgiveness under current program rules. They should also keep their contact information up to date with both their loan servicer and the Department of Education so they receive timely notices about any changes in processing timelines or eligibility criteria that could affect the year in which their loans are discharged.
Finally, while the tax consequences of post-2025 forgiveness may be significant, they do not erase the underlying benefit of having a large student loan balance wiped out. Even if a portion of the forgiven amount is taxed as income, many borrowers will still come out ahead compared with carrying the debt indefinitely. Understanding the rules, planning for potential liabilities, and watching for any legislative changes can help borrowers navigate the transition from the ARPA era back to the pre-pandemic tax framework for student loan forgiveness.
