Student loan forgiveness is taxable again: Should you refinance? | Earnest

Student loan forgiveness is becoming taxable again: What borrowers need to know

By Ashley Billing | Published on July 17, 2026

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TL;DR

As of 2026, most student loan forgiveness is once taxable again at the federal level.
Borrowers will have to pay taxes on any student loan balances forgiven through IDR plans (like PAYE, IBR, ICR, and the new RAP plan).
PSLF and certain other loan discharges are still expected to be tax-free.
For borrowers planning to pay off their loans—not wait for forgiveness—it may be worth it toconsider refinancing 1 .
If you aren't sure how these policy updates impact your specific debt profile, use our federal student loans decision hub to help map out your best path forward.
The federal student loan landscape is changing rapidly. Always verify your current status directly at studentaid.gov before making major financial moves.

For years, student loan borrowers were able to receive student loan forgiveness without getting a federal tax bill. That window has now closed.

As of 2026, student loan forgiveness is once again treated as taxable income—which means Americans who secure forgiveness could get stuck with a massive bill from the IRS. For some borrowers, this raises a key question: Does refinancing make sense now that student loan forgiveness is taxable again?

Here’s what’s happening, why it matters, and how to decide what to do next.

Is loan forgiveness taxable in 2026? Where things stand today

In early 2026, student loan forgiveness again became treated as taxable income at the federal level. But that wasn’t the only change. The Trump Administration also did some big restructuring of its income-driven repayment (IDR) plans. The highlights:

SAVE Plan shuttered: In March 2026, the Trump Administration officially sunsetted the “Saving on a Valuable Education” (SAVE) Plan. The SAVE Plan had promised to make student loan forgiveness accessible for millions of borrowers. Without SAVE, forgiveness is once again off the menu for many.
New RAP plan launched: The Department of Education has replaced SAVE with the new Repayment Assistance Plan (RAP). While RAP still offers a path to debt cancellation, you can only qualify for it after 30 years of on-time payments. That makes it one of the least accessible IDR plans yet.
Other IDR plans ending: Other plans—including Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR) Plans will be phased out by July 1, 2028.

Fortunately, Public Service Loan Forgiveness (PSLF) and other forms of student loan discharge remain tax-free—for now. (Check for updates on the federal student aid website before each tax year, just in case.) Here’s a closer look at the current loan forgiveness landscape and what it could mean for you.

Why student loan forgiveness has been tax-free—until now

In 2021, the American Rescue Plan Act made most student loan forgiveness federally tax-free from 2021 through the end of 2025. That provision was always temporary. Unless Congress extended it, the exemption was set to expire December 31, 2025. That means:

Forgiveness processed between 2021 and the end of 2025 is generally tax-free at the federal level
Forgiveness processed in 2026 or later may count as taxable income

Which types of loan forgiveness are taxable now?

Borrowers who receive forgiveness through income-driven repayment (IDR) plans may owe federal income tax on the forgiven balance.

With IDR plans, you make payments for a set number of years. After you’ve hit your quota, any remaining principal balance gets forgiven. Some IDR plans offer forgiveness after 20 to 25 years of qualifying payments. Others offer forgiveness after 30. Your exact term will depend on which of these four plans you’ve signed up for:

If you get part of your balance forgiven through an IDR plan, the forgiven amount could be reported as income on Form 1099-C. That could increase your taxable income for that year by up to thousands of dollars, depending on how much debt you had canceled.

Which types of forgiveness are still tax-free?

Now for some good news: Some types of student loan discharge are still excluded from federal income tax. These generally include:

Note: Tax treatment can change, and state rules vary, so borrowers should confirm details with a qualified tax professional.

How the tax update changes the math on forgiveness

When forgiven student debt is treated as income, it can create a larger one-time tax bill. For example:

Let’s say you typically make $50,000 per year—in other words, you have an adjusted gross income of $50k. Now let’s say that in 2026, you got $50,000 worth of loans forgiven.
The forgiven amount will be taxed—effectively doubling your total taxable income for that year. Before forgiveness, you were being taxed at a 12% rate on your $50k income. Tack on the forgiven amount, and the IRS suddenly sees your annual income as $100,000. That means you could be taxed at a 22% rate* on the full $100,000. That’s a significant increase.
Now, let’s say you chose to refinance instead. In this scenario, you’ll stay in the same tax bracket. You’ll still get the opportunity to accelerate your repayment timeline and save money over the life of your loans. The difference is that you’ll be able to pay them off on a more graduated timeline—potentially saving yourself a massive one-time tax bill. Before choosing this path, remember that refinancing federal loans means losing eligibility for federal forgiveness programs permanently. Borrowers should carefully calculate whether the long-term savings of refinancing outweigh the total value of the forgiven debt, even after accounting for the one-time tax hit.

Forgiveness can still be valuable. But once taxes are back in the picture, the math changes. If you’re still weighing the benefits of payoff vs. forgiveness, try using a tool like Payoff Path to help you choose a little more objectively. Payoff Path is a powerful calculator and online dashboard that can help you explore different repayment strategies. It’ll determine which one could save you the most money over the long run and help you understand how your choices might affect your timeline.

*For illustrative purposes only. Individual tax outcomes may vary.

Who’s affected by the student loan tax changes—and who isn’t

The 2026 tax changes are big, but they don’t affect all student loan borrowers equally. Here’s how to tell whether or not this is something you actually need to worry about.

You won’t be affected by the tax changes if you:

Only have private student loans
Are enrolled in PSLF
Are planning to enroll in PSLF (and meet the 2026 eligibility rules)
Just started student loan repayment and aren’t anywhere near forgiveness (though it’s still a good time to re-evaluate your payoff strategy)

You will be affected by the tax changes if you:

Are enrolled in an IDR Plan
Are about to earn student loan forgiveness through an IDR plan
Plan to one day earn IDR Plan forgiveness and want to make sure you’re choosing the right strategy

Should you refinance now that forgiveness is taxable?

For borrowers not pursuing PSLF and not relying on IDR forgiveness in the immediate future, the return of taxable forgiveness may be a reason to take a closer look at student loan refinancing.

Refinancing won’t be right for everyone. But for some borrowers, the new rules mean that the price and timeline of loan forgiveness could outweigh its benefits.

Unlike student loan forgiveness, refinancing offers:

A clearer payoff timeline
The opportunity to reduce your interest rate, potentially saving you money in interest charges over time.
More certainty amid a rapidly changing student loan landscape

If your goal is to pay off your loans and get them off your plate—rather than waiting decades for forgiveness—refinancing may help you move forward with a more predictable plan.

Forgiveness vs. refinancing: How to decide what’s right for you

Staying the course with loan forgiveness could make more sense for you if:

You’re enrolled in PSLF. Since PSLF has a shorter timeline and tax-free benefits, it’s often worth sticking with.
You expect to take advantage of federal borrower protections. When you refinance your federal student loans, they become private loans—which means you’ll give up access to hardship options like federal deferment and forbearance. If you expect to need these, you may want to keep your loans where they are.
You’ll be able to get a large amount forgiven. If student loan forgiveness could save you tens of thousands of dollars, it could very well be worth a big tax bill —and the interest charges you’ll incur on the long runway to forgiveness. Do the math to check the pros and cons for your specific situation.

Refinancing your student loans could make more sense for you if:

You won’t actually need the protections that come with federal student loans. When you refinance, you give up some federal hardship protections. However, few borrowers actually end up using these protections. If staying in the federal system is going to cost you thousands of extra dollars in interest that you could avoid through refinancing, maintaining access to these hypothetical protections may not be worth it.
You work in the private sector. If you have a strong, stable income and you don’t qualify for PSLF, then your only path to forgiveness is probably an IDR Plan. That means you’ll have to make payments for 20 to 30 years before you can even think about securing forgiveness. Do the math. Will you save more money by waiting that long and getting a fraction of your loans forgiven—or by refinancing to a potentially lower rate and paying off your loans early?
You can’t afford a one-time tax bill. If you don’t have enough savings to swing the new tax penalty, you may need to wait for forgiveness—or find a way to get an extension on your taxes.

Tax outcomes vary by individual and by state, so check with a tax professional before you make your final decision. There’s no single right answer. But after the recent tax rule change, now is an important time to take a closer look and make sure your strategy is still the right one for you.

Explore your next move

Not all borrowers want to wait 30 years for a tenuous promise of forgiveness. If you think paying off your student loans early might provide more peace of mind than waiting around on the RAP timeline, refinancing might be worth a second look.

Refinancing could help you lower your interest rate, shorten your loan term, and get out of debt faster. If you’re considering refinancing as part of your payoff strategy, you can check your options without impacting your credit. Get a free interest rate estimate through Earnest to help you make an informed decision.