Will I Owe Taxes on IBR Loan Forgiveness After 2025?

Updated on October 20, 2025

If you qualify for forgiveness under an income-driven plan—IBR, ICR, or PAYE—in 2025, your discharge will stay tax-free even if it’s processed in 2026.

Under a new court-supervised agreement between the AFT and the Education Department, the effective date of forgiveness is the day you become eligible, not when your servicer finishes processing.

The American Rescue Plan Act exclusion still expires December 31, 2025, but 2025-eligible borrowers are protected from federal taxes.

Why 2025 Is the Cutoff Year

Congress made student loan forgiveness tax-free only through December 31, 2025, under the American Rescue Plan Act (ARPA). Unless Congress acts, that exclusion ends in 2026, and forgiven balances could once again count as taxable income.

What changed is how the cutoff works. Under the AFT v. Education Department court agreement, the Department must treat the date you become eligible for forgiveness—after 20 or 25 years of payments—as the official discharge date for tax purposes.

That means if you reach forgiveness in 2025 under IBR, ICR, or PAYE, your discharge remains federally tax-free even if it’s finalized in 2026. Borrowers in the SAVE plan still need to switch to IBR before qualifying, since SAVE discharges remain paused during litigation.

What Happens If Your IBR Forgiveness Posts in 2026

The Education Department now treats the year you become eligible for forgiveness—not the year your servicer finishes processing—as the official discharge date for tax purposes.

That means if you reach 240 or 300 qualifying payments in 2025, your forgiveness is federally tax-free under the American Rescue Plan Act, even if the discharge is completed in 2026.

Borrowers who become eligible in 2026 or later, however, could again face federal taxes on forgiven balances unless Congress extends the ARPA exclusion.

Does My 2025 Approval Email Count for Tax Purposes?

The IRS determines which tax year applies based on the effective date of your discharge—not when you get the approval email or when your servicer completes processing.

The Education Department now defines that date as the month you reach forgiveness eligibility—the point when you hit 240 or 300 qualifying payments.

For example:

You reach 300 payments in November 2025.
Your servicer finishes processing in March 2026.
Your discharge letter lists an effective date of November 2025.
That 2025 date controls which tax year applies.

This means borrowers who qualify in 2025 through IBR, ICR, or PAYE remain federally tax-free even if their forgiveness posts the following year. Those who reach eligibility in 2026 or later would fall outside the ARPA window unless Congress renews the exclusion.

Could Processing Delays Push My Forgiveness Into 2026?

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.

Will My State Tax Forgiven Student Loans?

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.

What If My Forgiveness Ends Up Being Taxable?

If you reach forgiveness in 2026 or later, your forgiven balance could again be treated as taxable income under current law. In that case, the insolvency exclusion may reduce or eliminate what you owe.

Insolvency applies when, at the time of forgiveness, your total debts exceed your total assets. You claim it 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 wipe out the tax liability entirely. But the IRS requires detailed documentation of your finances as of the discharge date. A qualified tax preparer or enrolled agent can help you calculate whether you qualify and how much of your forgiven balance is excluded.

FAQs

When does the IRS consider my forgiveness “final” for tax purposes?

For income-driven repayment plans, the Education Department now uses your eligibility date—the month you reach 240 or 300 qualifying payments—as the effective discharge date for tax reporting. If you became eligible in 2025 under IBR, ICR, or PAYE, that 2025 date controls the tax year, even if the discharge posts in 2026.

Can Education Department delays push my discharge into 2026?

Processing could still take months, but your eligibility date—not the posting date—determines whether the discharge is tax-free. If you reached forgiveness in 2025 under IBR, ICR, or PAYE, your discharge remains federally tax-exempt even if finalized in 2026.

Does the 30-day opt-out window affect my tax year?

No. Your tax year depends on the effective date—the month you hit your forgiveness threshold—not when the opt-out period ends or your servicer completes processing. Even if your notice carries into January, a 2025 eligibility date keeps your discharge inside the federal tax-free window.

What if I’m in the SAVE plan?

SAVE forgiveness remains paused while litigation continues. Borrowers who’ve reached 20 or 25 years of payments must switch to IBR before the Department can process forgiveness. Once you switch, your 2025 eligibility date still counts for federal tax-free status.

What if I’m in the SAVE plan?

Why were PPP loans forgiven tax-free while student loans might be taxed?

Congress explicitly authorized forgiveness for Paycheck Protection Program (PPP) loans in the CARES Act. Forgiveness was built into PPP’s design to keep payrolls running during pandemic shutdowns. Student-loan forgiveness, by contrast, relies on narrow statutory authority within programs like IBR, ICR, and PAYE. Unless Congress extends ARPA’s tax exclusion beyond 2025, forgiven balances under these plans could again be treated as taxable income.