Written By Adam S. Minsky, JD
Updated on March 18, 2026
Your 2026 taxes are due in just a few weeks, but the tax landscape for student loans seems to be ever-changing. Major legislative updates went into effect this year that may impact millions of student loan borrowers, either now or when you complete your tax return for this year (2026) in 2027.
Here’s a breakdown of some of the biggest tax updates you should know about, and what they might mean for your bottom line.
Student loan forgiveness under IDR plans is taxable again
One of the biggest tax changes for student loans this year is that student loan forgiveness under income-driven repayment (IDR) plans is now taxable again. IDR plans allow borrowers to discharge their student loans after being in repayment for 20 to 30 years, depending on the specific plan.
The taxability of IDR student loan forgiveness has been a roller coaster of changes. Historically, IDR loan discharges were treated as taxable income. The Education Department would issue a Form 1099-C “Cancellation of Debt” document to borrowers, requiring them to report the discharge as “income” on their federal tax return, leading to potentially massive tax liability. That changed in 2021, when a Democratic Congress and President Joe Biden passed the American Rescue Plan Act. That legislation exempted all student loan forgiveness, including under IDR plans, from federal taxation. But that relief expired at the end of 2025, and congressional Republicans and President Trump declined to extend it in the One Big Beautiful Bill Act (OBBBA) enacted last summer. As a result, IDR student loan forgiveness became taxable again as of January 1, 2026.
That means, outside of certain exceptions, borrowers who received IDR student loan forgiveness in 2025 should not receive a Form 1099-C, but those who got an IDR discharge during 2026 might. Borrowers may have other ways to potentially reduce or eliminate any resulting tax liability (e.g., by demonstrating insolvency), but it would be prudent to consult a qualified tax advisor, given the potential for significant tax exposure.
Major exception for IDR student loan forgiveness taxation
While IDR student loan forgiveness reverts to being taxable again in 2026, there is one important exception.
Last fall, the American Federation of Teachers (AFT) entered into an agreement with the Education Department to address ongoing litigation over allegedly stalled or delayed IDR applications and IDR student loan forgiveness. Under the terms of that agreement, borrowers who reached eligibility for an IDR student loan discharge during 2025, but don’t receive a discharge until sometime in 2026, should still be shielded from federal tax liability and should not be issued a Form 1099-C.
“The defendants shall use only the date a borrower becomes eligible to have their loans cancelled under the IBR, Original ICR, or PAYE plans as the effective date of discharge of their loans,” reads the agreement filed in federal district court for the District of Columbia last October. “It is further ORDERED that the defendants shall not file an Internal Revenue Service (“IRS”) Form 1099-C for borrowers who becomes eligible for the discharge of their loans in 2025 if the conditions in IRS Notice 2022-1 are satisfied.”
The agreement also includes a provision to protect borrowers who qualified for student loan forgiveness in 2025 but were enrolled in the Saving on a Valuable Education (SAVE) plan and then applied to switch to one of the other IDR plans before the end of last year. Student loan forgiveness under SAVE has been blocked for nearly two years due to legal challenges.
“It is further ORDERED that for the defendant’s internal purposes, when a borrower (1) has achieved eligibility under the Saving on a Valuable Education (“SAVE”) plan, (2) applies to transfer to one of the IBR, Original ICR, or PAYE plans on or before December 31, 2025, and (3) that application is approved on or after January 1, 2026—the date that borrower becomes eligible for cancellation under the new plan constitutes the effective date of their loan discharge, even if that date falls on or before the date the borrower’s application was approved,” reads the agreement.
Student loan forgiveness remains tax-free for TPD discharges, PSLF and borrower defense to repayment
Outside of the exception in the AFT litigation, IDR student loan forgiveness is taxable this year. But that’s not necessarily the case under some other loan forgiveness and discharge programs.
While they allowed tax relief for IDR student loan forgiveness to expire under the OBBBA, congressional Republicans agreed to make permanent the tax relief for the Total and Permanent Disability (TPD) discharge program. The TPD Discharge program allows borrowers to discharge their federal student loans if they are unable to engage in substantial, gainful activity due to a lingering or terminal medical impairment. GOP lawmakers originally made TPD Discharges tax-free when they passed the 2017 Tax Cuts and Jobs Act during the first Trump administration. The OBBBA makes that change permanent.
Several other student loan forgiveness and discharge programs that were not taxable federally prior to 2021 (when the American Rescue Plan Act was passed) remain tax-free now. These include Public Service Loan Forgiveness (PSLF) and some school-based discharge programs, such as Borrower Defense to Repayment, which allows borrowers to request a discharge of their federal student loans on the basis of certain types of school misconduct.
However, just because a federal student loan forgiveness or discharge program is not taxable federally doesn’t necessarily mean it’s not taxable at the state level. Many states will mirror the federal tax treatment of debt cancellation, but that’s not always the case.
“The amount of your loan that’s discharged due to TPD discharge may be considered income for state tax purposes,” warns the Education Department on its web page for the TPD Discharge program. “Consult with your state tax office or a tax professional before you file your state tax return.”
Student loan interest tax deduction remains but is limited
GOP lawmakers considered terminating the tax deduction for student loan interest in the OBBBA, but ultimately kept the deduction intact. However, the deduction does have limits.
“Student loan interest is interest you paid during the year on a qualified student loan,” says the IRS in online guidance. “It includes both required and voluntarily prepaid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.”
“For 2025, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $85,000 and $100,000 ($170,000 and $200,000 if you file a joint return),” explains the IRS in separate online guidance. “You can’t claim the deduction if your MAGI is $100,000 or more ($200,000 or more if you file a joint return).”
Borrowers who may qualify for the student loan interest tax deduction should be issued a Form 1098-E Student Loan Interest statement by their lender or servicer. However, receipt of the 1098-E does not guarantee that you would be able to take the deduction, as it would be subject to the caps and limits above.
