Does California Tax Student Loan Forgiveness?

For most California borrowers, the answer is still no — but as of 2026 it’s no longer an automatic blanket “no.” Whether your forgiveness is taxed now depends on the type of forgiveness and the year you receive it.

The reason: the broad federal exclusion that made nearly all student loan forgiveness tax-free expired at the end of 2025. California’s protections didn’t all expire with it — but they no longer cover every kind of forgiveness the way they did from 2021 through 2025.

Here’s what California still shields, what changed, and how to tell which bucket you’re in.

• California still does not tax most forgiven student loans — but the protection now depends on the forgiveness program, not a single blanket rule.

• Income-based repayment (IBR) forgiveness is permanently tax-free in California under a standing state exclusion with no expiration date.

• PSLF, disability and death discharges, and bankruptcy discharges are tax-free at both the federal and California levels.

• The federal American Rescue Plan exclusion expired December 31, 2025. Forgiveness received in 2026 or later is federally taxable again unless a specific exemption applies.

From 2021 through 2025, the American Rescue Plan Act (ARPA) made essentially all student loan forgiveness federally tax-free. That provision expired on December 31, 2025, and Congress did not replace it.

So timing matters. Forgiveness received in 2021–2025 was federally excluded. Forgiveness received in 2026 or later is federally taxable again — and lands back in your federal adjusted gross income — unless it falls into one of the lasting federal exemptions:

• Public Service Loan Forgiveness (PSLF) — always tax-free.

• Death and total-and-permanent-disability discharges — tax-free.

• Student loans discharged in bankruptcy — tax-free.

• Amounts excluded because you were insolvent when the debt was forgiven (IRS Form 982).

California’s treatment then layers on top of that federal result.

California starts from your federal income, so what California does with forgiveness depends on whether the state has its own exclusion for it.

IBR forgiveness: permanently tax-free in California

California has a standalone, permanent exclusion for forgiveness under income-based repayment. (Cal. Rev. & Tax. Code § 17132.11(a), tied to 20 U.S.C. § 1098e.) It has no sunset and does not depend on the federal ARPA rule.

So if your remaining balance is forgiven at the end of an IBR plan, that forgiveness stays tax-free in California in 2026 and beyond — even though it may now be federally taxable.

AB 26 and SB 220 covered 2021–2025

You may have read that AB 26 and SB 220 make student loan forgiveness tax-free in California. Those laws conformed California to the federal ARPA exclusion — but only for the same 2021 through 2025 window.

That window has now closed along with the federal exclusion, so AB 26 and SB 220 are no longer what’s keeping 2026 forgiveness tax-free. The permanent IBR exclusion above is.

Other income-driven plans: less settled for 2026+

For the other income-driven plans — ICR, PAYE, REPAYE/SAVE — California’s separate exclusion expired back in 2022, and those plans then relied on the ARPA bridge, which expired at the end of 2025.

So for forgiveness under a non-IBR plan received in 2026 or later, the California treatment is genuinely unsettled, and it could be taxable at the state level. If you’re on one of these plans and approaching forgiveness, confirm the current rule for your situation before you assume.

PSLF, disability, death, and bankruptcy: tax-free both ways

Because these discharges are excluded from your federal income in the first place, they never enter the California return either. PSLF, total-and-permanent-disability and death discharges (death/disability also have their own permanent California exclusion under Rev. & Tax. Code § 17144.8), and bankruptcy discharges are tax-free at both the federal and California levels.

• On IBR? Your end-of-term forgiveness stays California-tax-free. Plan for a possible federal bill in 2026+, but not a state one.

• On PSLF, or facing a disability/death or bankruptcy discharge? Tax-free at both levels — nothing to set aside.

• On ICR, PAYE, or SAVE? Plan for the federal tax on 2026+ forgiveness, and treat the California side as uncertain until you confirm it.

Forgiveness amounts can be large, so if you’re within a year or two of the finish line, it’s worth checking both the federal and California treatment before the discharge hits.

• California Franchise Tax Board: California’s tax authority — the official source for how the state treats discharged debt.

• IRS Topic No. 431, Canceled Debt: when the IRS does and doesn’t count forgiven debt as income.

• State of California Student Loan Forgiveness Programs: the forgiveness paths California borrowers actually use.

California still protects most student loan forgiveness from state tax — permanently for IBR forgiveness, and automatically for PSLF, disability, death, and bankruptcy discharges. What changed in 2026 is the federal side and the lapse of the broad ARPA-era conformity, which leaves non-IBR plan forgiveness less certain at the state level.

If you’re not sure which bucket your forgiveness falls into, tell us about your situation and we’ll help you figure out what — if anything — you’ll owe.

Related reading:

• Filing Taxes With Student Loans

• The Tax Implications of Settling Student Loan Debt

• How IRS Insolvency Affects Student Loan Forgiveness Taxes

• SAVE Plan Tax Bomb

Is student loan forgiveness taxable in California?

Usually not. IBR forgiveness is permanently excluded from California income, and PSLF, disability, death, and bankruptcy discharges are tax-free at both levels. The main open question is forgiveness under non-IBR plans (ICR, PAYE, SAVE) received in 2026 or later, where the California treatment is now unsettled.

Does California offer its own student loan forgiveness program?

No. California doesn’t cancel student debt itself — borrowers rely on federal programs like PSLF and income-driven forgiveness. What California does is keep most of that forgiveness from being taxed at the state level.

What is the student loan interest deduction for California?

California doesn’t offer one. Unlike the federal system — which lets you deduct up to $2,500 in student loan interest — California’s tax code provides no state deduction for student loan interest.