Student loan borrowers who recently became or will soon become eligible for loan forgiveness through income-driven repayment plans can breathe easy knowing they won’t receive a tax bill for their discharged loans.
The Department of Education clarified on Oct. 17 that borrowers who become eligible for loan forgiveness in 2025 will not owe federal taxes on the forgiven amounts, even if their loans aren’t officially discharged before the end of the year. That applies to borrowers who earned loan forgiveness by making qualifying payments for 20 or 25 years on the income-based, income-contingent or Pay As You Earn repayment plans.
The clarification brings relief to borrowers who were recently notified of their forgiveness eligibility but may still be waiting for their balances to be zeroed out. The announcement comes as part of an agreement between the Department of Education and the American Federation of Teachers, a union, which are battling in court over income-driven repayment plan application backlogs and processing delays.
Borrowers who have had their student loans forgiven haven’t had to pay federal taxes on the forgiven amounts due to a provision outlined in the American Rescue Plan of 2021. But that provision is set to expire at the end of 2025, and some borrowers feared if they didn’t see their loans forgiven by the end of the year, they could face a tax bill in 2026 when their balances are discharged.
