Your IDR Forgiveness Now Comes With a Tax Bill. On $40,000, Figure $8,800.

If you’re a year or two from the finish line on an income-driven repayment plan, the check you’ve been counting down to now arrives with a bill attached.

Not from your servicer. From the IRS.

The American Rescue Plan Act made forgiven federal student loan balances tax free, and it covered discharges from 2021 through the end of 2025. It expired. Nobody extended it. MEFA puts it plainly: beginning in 2026, IDR forgiveness may once again be treated as taxable income for federal tax purposes.

Which means the balance your servicer wipes out gets added to your income for the year, and you settle up in April.

What that looks like on a real return

Say you earn $70,000, file single, and $40,000 gets forgiven this year.

Take the 2026 standard deduction of $16,100 and your taxable income is $53,900, which puts you in the 22% band. The IRS set the 22% threshold for single filers at income over $50,400 for 2026, with 24% not starting until $105,700. Add the $40,000 discharge and you’re at $93,900. Still 22%.

So the whole forgiven balance gets taxed at 22%. That’s $8,800.

State tax, if your state taxes it, is on top.

Nobody sends you a heads-up. What arrives is a Form 1099-C. The IRS requires the lender to file one for any canceled debt of $600 or more, and it lands in January or February of the following year, so a 2026 discharge shows up on the return you file in early 2027. Plenty of borrowers will meet this number for the first time inside a filing app.

Three things that change the answer

Chasing PSLF? You’re fine. Public Service Loan Forgiveness stays out of income under Section 108(f)(1), which excludes a discharge you earned by working a set period in certain professions. That distinction just got a lot more expensive, and it belongs in any plan decision you’re making this quarter.

Did you hit eligibility in 2025 but the discharge only landed in 2026? Student Loan Planner reports that the AFT litigation settlement filed in October 2025 says you should be shielded, and should not get a 1099-C at all, because the settlement treats the date you became eligible as the discharge date for tax purposes. If a 1099-C shows up anyway, don’t pay it on autopilot.

Broke at the moment of forgiveness? IRS Topic 431 lists debt canceled to the extent you’re insolvent among the exclusions from income, claimed on Form 982. Real provision, real paperwork.

Do this now, not in April

Pull up your servicer account and find your payment count. If forgiveness lands inside the next two years, you have a number to plan around, and it’s the balance times your marginal rate.

Then set it aside every month, the way you would for a tax bill you already knew about, because that’s what this is. Our student loan calculator will project the remaining balance so you’re multiplying a real figure and not a guess.

And book the tax professional before the discharge, not after the 1099-C. Insolvency and the AFT settlement are both things you want established with paperwork in hand, and neither one is a conversation you win in April.

More on how the plans compare after July’s overhaul is in our education guides.

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