US federal loans forgiven under an income-driven repayment (IDR) plan from 2026 onward are generally treated as taxable income at the federal level. The American Rescue Plan Act exclusion covered discharges from 2021 through 2025 and was not extended.
What is still tax-free federally
- Public Service Loan Forgiveness and Teacher Loan Forgiveness.
- Death and total and permanent disability discharges.
- Borrowers who reached their IDR forgiveness milestone before 1 January 2026, even if the discharge is processed later (per Education Department guidance). Keep any dated eligibility notice.
State rules vary, so check your state separately.
Put a number on it
The forgiven balance is added to your income for that year. At a 22% federal rate, $25,000 forgiven is about $5,500 of federal tax. Part of it may fall into a higher bracket, so treat this as a rough figure.
Spread it out
If forgiveness is 20 years away, $5,500 is about $23 a month set aside. Keep it in savings or a simple investment account labelled for that purpose. If it is 2 years away, it is about $230 a month, so the earlier you start the easier it is.
The insolvency exclusion
If your total debts are larger than the value of everything you own on the day the debt is forgiven, you may be able to exclude some or all of the forgiven amount by filing IRS Form 982. Write down your assets and debts as of that date.
Watch for Form 1099-C
The servicer reports the cancelled amount on Form 1099-C, usually early the following year. Check it against your own records.
Free tools
- Student loan payoff calculator: https://smartbudgetsheets.surge.sh/calculators/student-loan-payoff-calculator/?utm_source=mataroa
- Savings goal calculator: https://smartbudgetsheets.surge.sh/calculators/savings-goal-calculator/?utm_source=mataroa
- Sinking funds calculator: https://smartbudgetsheets.surge.sh/calculators/sinking-funds-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.