Will Student Loan Discharge Be Taxed in 2026? What Every Borrower Needs to Know
- JP Marino, EA
- Nov 24
- 3 min read
For years, millions of borrowers have relied on income driven repayment plans with the promise that any remaining balance would eventually be forgiven. Thanks to the American Rescue Plan Act, most federal student loan discharges have been tax free at the federal level through the end of 2025. That temporary break is coming to an end soon, and unless new action is taken, the tax rules will take a sharp turn.
Beginning January 1, 2026, balances forgiven under income driven repayment plans will generally be treated as taxable income. This means that if a borrower reaches the end of their 20 or 25 year repayment term after the tax exclusion expires, the forgiven amount could be added to their taxable income for that year. For many people, this shift could create an unexpected and substantial tax bill.
Why Borrowers Should Pay Attention Now
The potential tax impact is not small. A taxpayer earning $50,000 per year who has a large remaining balance forgiven could easily face more than $9,000 in additional federal taxes. Since most borrowers entering forgiveness have been making reduced payments based on income, this added liability could create real financial stress.
Lawmakers are aware of the problem. A group of Senate Democrats, led by Senator Elizabeth Warren, has urged the IRS and the Treasury Department to explore administrative relief using existing exclusions such as the insolvency exception, the scholarship exclusion, or the general welfare exclusion. These options could soften or remove the tax burden, but nothing is guaranteed yet. Until official guidance is released, borrowers must prepare for the possibility of taxable forgiveness.
How the Insolvency Exclusion Might Help
One potential form of relief already built into the tax code is the insolvency exclusion. Taxpayers may avoid paying taxes on certain canceled debts if they were insolvent at the time the debt was forgiven. Insolvency simply means your debts were greater than the fair market value of your assets.
Many long term student loan borrowers, especially those with large balances, may qualify. However, proving insolvency requires proper documentation. This can include bank statements, loan documents, property valuations, and other financial records that show your overall financial picture at the time of discharge. Since this process can be complex, starting early and working with a qualified tax professional is crucial.
How Borrowers Can Prepare Before the Exclusion Expires
The best strategy is preparation. Here are steps borrowers should take now:
Confirm your repayment timeline. If your loan forgiveness date falls in 2026 or later, be aware that the resulting discharge may be taxable under current rules.
Estimate potential tax liability. A tax professional can help you project what your forgiven balance could add to your taxable income.
Review your financial position. Understanding whether you may qualify for the insolvency exclusion can help reduce or eliminate a tax bill.
Plan for possible tax payments. Setting aside funds or adjusting withholdings can help you avoid surprises.
Stay informed. Congress and federal agencies may still act. Guidance could change, but your financial readiness should not depend on uncertain policy developments.
Why Marino Tax Solutions?
The end of the federal tax exclusion for student loan forgiveness could reshape the financial outlook for borrowers who have spent decades making payments. While there is growing pressure on federal agencies to find solutions, no one should wait for last minute relief. Preparing now is the smartest way to avoid being caught off guard.
We understand that life gets busy and tax rules can feel overwhelming. That’s why we specialize in helping individuals and businesses recover missed refunds, file back taxes, and take advantage of every credit available to them.
At Marino Tax Solutions, we are committed to keeping you informed about the latest tax policies and programs, including IRS updates, so you always receive accurate guidance for making informed financial decisions.
Curious about how these tax changes could impact your personal or business finances? Marino Tax Solutions is here to assist you. Contact us today for a Free Consultation and customized tax planning solutions to help you stay ahead and capitalize on these new opportunities.
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered tax advice. Tax laws are complex and subject to change. Please consult with a tax professional like Marino Tax Solutions to discuss your specific circumstances.
