What changed at the end of 2025?
The American Rescue Plan Act had excluded forgiven student loan debt from federal taxable income, and that exclusion — codified at 26 U.S.C. §108(f)(5) — expired on December 31, 2025. The pre-2021 default is back: a balance forgiven at the end of an income-driven plan in 2026 or later counts as federal taxable income in the year it's forgiven, the same way canceled debt generally does. People call the result the "tax bomb" because it arrives as one large bill in a single tax year, often decades from now.
Which forgiveness is still tax-free?
Public Service Loan Forgiveness. PSLF forgiveness after 120 qualifying payments is not federally taxed — before, during, or after this change. That difference is one reason PSLF borrowers weigh plans differently: a lower qualifying payment leaves more to forgive tax-free. Details at the official PSLF page.
How big could the tax bill be?
Not forgiven amount × one tax rate — that shortcut is the most common way this gets overestimated. A forgiven balance is added on top of your other income for that year, so it is taxed a slice at a time as it climbs through the brackets. Most of it usually lands well below your top rate.
A worked example. Single filer, $50,000 of income, $20,000 forgiven. The standard deduction leaves $33,900 of taxable income, already in the 12% bracket. The forgiven $20,000 stacks on top: $16,500 of it fills the rest of the 12% bracket ($1,980), and the last $3,500 crosses into 22% ($770). Total: an estimated $2,750 — an effective rate of 13.75%, not 22%. A flat 22% would have claimed $4,400, about 60% too much.
The comparison on the homepage does exactly this arithmetic for each plan, using your own inputs and the federal brackets, and shows the estimated tax next to each forgiven amount. Because the plans forgive different amounts in different years, the effective rate genuinely differs from card to card — that is the calculation working, not an inconsistency. And when a plan pays off before forgiveness there is nothing to tax at all, which is itself a difference worth seeing side by side.
Two honest limits. Nobody knows what the tax code will look like in 2050, so this is an estimate and every figure is labelled as one — you can override it with a single flat rate if you would rather. And state tax is not included; treatment varies by state.
State taxes vary, and whether any of this applies to you depends on your situation in the forgiveness year (insolvency rules, filing status, and state conformity all matter). RepayCompass estimates the federal effect with a labeled assumption and stops there — sizing the real thing is a job for a tax professional.
Which plans project forgiveness at all?
- RAP — forgiveness after 30 years (360 payments). The official wording: the forgiven amount "may be considered income for tax purposes."
- IBR — forgiveness after 20 years (borrowers whose first loan came on or after July 1, 2014) or 25 years (earlier borrowers).
- PAYE — forgiveness after 20 years, but the plan retires no later than July 1, 2028, forcing a mid-stream switch first.
- ICR — forgiveness after 25 years, counting only payments made on or before July 1, 2028 — effectively unreachable for someone entering now.
- Standard and Tiered Standard — no forgiveness; the balance is simply paid off. No forgiveness, no forgiveness tax.
Whether a plan even reaches forgiveness depends on your numbers: a high income against a small balance can pay off before the clock matters, while a low income against a large balance makes the projected forgiveness — and its estimated tax — a first-class part of the comparison. That interaction is exactly what RAP vs IBR walks through, and what the calculator on the homepage computes for every plan you're eligible for.