rewrite this title and make it good for SEOTax-free student loan forgiveness ends in 2025. Will you owe more?

For those struggling with student loan debt, the idea of loan forgiveness can sound like a dream come true. Thanks to the American Rescue Plan Act of 2021, students could qualify for loan forgiveness without worrying about surprise tax bills — the act made all federal student loan forgiveness programs tax-free.

However, that provision is set to expire at the end of this year. Loans forgiven on or after Jan. 1, 2026, may be taxable as income.

The American Rescue Plan Act affected all forms of loan forgiveness for both federal and private student loans. Some forms of loan forgiveness, such as Public Service Loan Forgiveness (PSLF), were already exempt from federal income taxes, but other programs were not. Here’s how the expiration of the American Rescue Plan Act will affect different programs:

Student loan borrowers who work for nonprofit organizations and who have federal loans are likely eligible for PSLF. If you meet the service requirements and make 120 qualifying payments, the government will forgive your loan balance.

Forgiven loans under PSLF have never been taxable, and that tax-free forgiveness will continue into 2026 and beyond.

For borrowers struggling with student loan repayment, income-driven repayment (IDR plans) can provide relief. As of the third quarter of 2025, there were about 13 million people enrolled in IDR plans, according to Federal Student Aid.

These plans base your monthly payments on a percentage of your discretionary income and family size, and they have repayment terms of either 20 or 25 years. If a borrower still has a balance at the end of the repayment term, the federal government forgives the remainder.

Under the terms of the various IDR plans, borrowers who qualify for loan forgiveness must pay taxes on the amount forgiven. Due to the American Rescue Plan Act, borrowers whose loans were forgiven between Jan. 1, 2021, and Dec. 31, 2025, are exempt from taxes on their forgiven loan balances.

If you’re enrolled in an IDR plan and eligible for forgiveness before the end of 2025, you will also not be taxed on the forgiven amount — even if your forgiveness isn’t actually processed until 2026. If your loans are eligible for forgiveness on or after Jan. 1, 2026, you will owe federal taxes on the forgiven balance.

Teacher Loan Forgiveness is a federal loan program for teachers who work in low-income schools. Starting on Jan. 1, 2021, loans discharged through this program were exempt from income taxes, and that is not expected to change. You’ll continue to be exempt from federal income taxes on your discharged loan balance.

The American Rescue Plan Act made both federal and private student loans discharged due to death or disability exempt from federal income tax. Although that provision will end this year, the One Big Beautiful Bill (OBBB) — the Trump administration’s signature bill — modified these forms of loan discharge.

Under the OBBB, federal and private student loans that are discharged due to death or disability are not taxable as income; the OBBB has no expiration date for these forms of discharge.

The expiration of the American Rescue Plan Act’s student loan forgiveness provisions could have a significant impact. Because of how sudden and unexpected these taxes can be, they’re known as a “student loan tax bomb.” But how bad can it be? Consider this example:

Jan graduates with $40,000 in student loan debt after graduate school, with a 7.94% interest rate. She secures a job earning $40,000 per year. Assuming she’s single with no dependents, she enrolls in Pay As You Earn (PAYE), one of the available IDR plans. Thanks to the IDR plan, she pays just $138 per month toward her loans. For the sake of the example, her income never changes.

After 20 years, she’s repaid a total of $19,839, but her remaining loan balance is $51,921. If her loans were forgiven in 2026, that amount would be added to her taxable income, pushing her into a higher tax bracket. As a result, she would owe $10,575 in additional taxes.

Important: The example above only considers federal income tax. Some states also tax student loan forgiveness, so you may owe additional state taxes.

The federal tax exemption for some forms of loan forgiveness will expire on Dec. 31, 2025. If you have loans that may be forgiven after that date, here’s how to prepare:

Estimate your loan forgiveness amount: You can use the Office of Federal Student Aid’s loan repayment simulator to get an idea of how much of your loan balance will be forgiven. Then, you can use a student loan forgiveness tax bill calculator to estimate how much you’d owe in extra taxes.

Figure out if you’re insolvent: The IRS may waive the extra tax bill if you can prove you’re insolvent, meaning your total debt exceeds your assets. To claim the insolvency exclusion, you must fill out Form 982.

Enter into a payment plan: If you don’t qualify for a waiver, you may enter into a tax payment plan. With this option, you can pay your tax bill in installments over several years. You can request a payment plan by filing Form 9465.

Set aside cash: If you’re still months or years away from loan forgiveness, setting aside a little cash each month can help you build up your savings so you can pay off your tax bill when it comes down the line.

If you need help figuring out how loan forgiveness will affect your taxes or coming up with a plan to handle the tax consequences, contact a tax professional.

Not eligible for forgiveness? Student loan refinancing could help you better manage your debt.

This article was edited by Alicia Hahn.