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?
A reasonable estimate is forgiven amount × your marginal tax rate in the forgiveness year. Nobody knows their marginal rate decades out, so this site uses an adjustable assumption (default 22%) and labels every tax figure as an estimate. As pure arithmetic: $40,000 forgiven at an assumed 22% marginal rate is an estimated $8,800 federal bill in that single year. The comparison at the top of this page projects each plan's forgiven amount from your actual inputs and shows the estimated tax next to it — and when a plan pays off before forgiveness, there's nothing to tax, which is itself a difference worth seeing side by side.
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 above computes for every plan you're eligible for.