Could Forgiven Student Loans Trigger a Tax Bill in 2025? State and Federal Breakdown
Tax season is just around the corner, and if you’ve had student loans forgiven, you’re probably wondering if it’ll affect your taxes. Here’s the lowdown on how forgiven student loan debt is treated in 2025 and what you need to watch out for when filing your tax return.
Federal Tax Rules Favor Borrowers (For Now)
Good news first: if your student loan is forgiven in 2025, you won’t owe federal taxes on the amount wiped out. Thanks to a temporary rule under the American Rescue Plan Act (ARPA), student loan forgiveness is tax-free at the federal level through the end of 2025.
This tax-free status applies to popular forgiveness programs like:
- Income-Driven Repayment (IDR) Plans: These adjust your monthly payments based on your income, with the remaining balance forgiven after 20-25 years.
- Public Service Loan Forgiveness (PSLF): Available to public sector workers after making 120 qualifying monthly payments.
Without additional legislation, this tax exemption expires in 2026, meaning forgiven loans may once again be considered taxable income federally.
But Watch Out for State Taxes
Here’s where it gets tricky: not all states follow federal rules. While many states align with the federal tax code and won’t tax forgiven loans, some, like Indiana, Mississippi, and North Carolina—treat forgiven debt as taxable income.
That means borrowers in these states could face a state tax bill, even though the forgiven debt is tax-free at the federal level. It’s always smart to check your state’s rules or ask a tax expert for clarity.
What Happens After 2025?
Unless Congress takes action, the current tax-free status for forgiven student loans ends on December 31, 2025. Starting in 2026, borrowers could once again be taxed on the forgiven amount at both federal and state levels.
President Biden has proposed making the tax exemption permanent, but it’s unclear if this will gain enough support to become law. For now, borrowers should prepare for potential changes after 2025.
Key Tips for 2025 Filers
- At the federal level, you’re safe: Forgiven student loans won’t count as taxable income in 2025.
- Check your state’s rules: Some states still tax forgiven loans, so double-check with your local tax authority or consult a tax pro.
- Plan for 2026 and beyond: Stay updated on legislative developments that could impact how forgiven loans are taxed in the future.
If you’re unsure about how these rules apply to you, reaching out to a tax professional can help you navigate any surprises and give you peace of mind during tax season.
