Will I Owe Taxes on IBR Loan Forgiveness After 2025?

If your student loans are forgiven before December 31, 2025, you won’t owe federal income tax on the balance. After that, the American Rescue Plan Act (ARPA) tax break expires, and forgiven debt could once again be treated as taxable income. Unless Congress extends the exclusion, borrowers whose discharges post in 2026 may face a bill when they file their taxes.

Congress made forgiven student debt tax-free through December 31, 2025. After that, the federal exclusion ends, meaning an IBR student loan forgiveness dated in 2026 could count as taxable income unless lawmakers act.

In late September and October, the Education Department began emailing borrowers approval notices with a 30-day opt-out deadline (for example, October 21). The agency said most discharges would process soon after, though system delays could push some into 2026. If your forgiveness posts next year, plan for a potential tax bill unless Congress or the IRS issues new guidance.

Right now, the U.S. Department of Education is only processing loan forgiveness under IBR. Discharges under SAVE, PAYE, and ICR remain blocked by litigation — meaning those borrowers won’t see forgiveness until 2026 or later, when it will likely be taxable.

If your IBR forgiveness is approved in 2025 but posts in early 2026, the forgiven balance will likely be added to your 2026 income, potentially triggering a sizable tax bill.

What matters for taxes isn’t when you qualified — it’s when your forgiveness is finalized. The IRS treats forgiven debt as taxable income in the year the discharge is completed.

Some advocates argue the 2025 approval emails should count as the “identifiable event” that fixes the tax year, but the IRS hasn’t confirmed that interpretation. Until formal guidance arrives, assume the processing date — not the approval date — controls which tax year applies.

Related: How to Fix Your IBR Payment Count

The IRS decides when forgiven debt becomes taxable based on the “identifiable event” — the date that determines which tax year the discharge falls in. For borrowers under IBR, that date isn’t when you were approved or when your servicer finishes processing — it’s the effective date of your discharge.

Here’s how that typically works:

• You hit your 240- or 300-month mark in November 2025

• Your servicer doesn’t finish processing until March 2026

• Your discharge letter lists an effective date backdated to November 2025

• That November 2025 date is what gets reported to the IRS

If the Education Department consistently applies this practice, many borrowers who crossed the forgiveness threshold in 2025 could still fall inside the tax-free window even if their discharges are processed in 2026.

But there’s no formal confirmation yet that the Department will backdate every IBR discharge or that the IRS will uniformly accept those dates for the 2026 sunset. Borrowers whose eligibility falls late in 2025 — or whose approvals aren’t issued until 2026 — remain in a gray area.

Processing delays could push your discharge into 2026, even if you qualify this year. The tax year of your discharge depends on the exact date the Education Department and your servicer finalize it. Reaching 240 or 300 months only makes you eligible; the tax clock starts when the discharge is officially processed.

That process remains opaque.

The Department hasn’t clarified how long it takes from approval notice to posted discharge, or whether litigation, staffing shortages, or a government shutdown could delay finalization into 2026. Borrowers approved late in the year face the greatest risk that backlogs will push their forgiveness past the cutoff.

Federal taxes aren’t the only risk. Even if Congress extends the federal exclusion, borrowers could still face state-level taxation because of timing gaps.

Most states currently mirror federal rules on student-loan forgiveness. If Congress extends the federal exclusion, those conforming states must update their tax codes to stay aligned. Many legislatures won’t reconvene until months into 2026, creating a regulatory lag that could make early-year discharges taxable by default.

Only a few states — Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin — already treat forgiven student loans as taxable income. Borrowers everywhere else should monitor their state’s 2026 guidance to confirm whether updates pass before filing season.

The main safety valve is the insolvency exclusion. It lets you reduce or eliminate tax on canceled debt if, at the time of forgiveness, your total debts exceeded your total assets. You claim this on IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness).

For many long-term borrowers with large balances and modest assets, insolvency can eliminate the tax liability entirely. But the IRS requires detailed documentation of your financial situation as of the discharge date. A qualified tax preparer or enrolled agent can help you determine whether you qualify and how much of your forgiven balance would be excluded.

Related: How Insolvency Affects Taxes on Student Loan Forgiveness