American Rescue Plan Student Loan Forgiveness: How it Works

• The American Rescue Plan Act makes forgiven federal student loans tax-free until December 31, 2025, giving you temporary relief from potential tax bills.

• If your forgiveness is delayed past 2025, you may need to prepare for taxes on forgiven loans unless new legislation extends the tax exemption.

• Strategize your repayment plan now to avoid unexpected costs and consider speaking with an expert to navigate program delays and policy changes.

The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through December 31, 2025. This temporary benefit has been a relief for borrowers, especially those with significant federal student loan debt, as it removes the added burden of paying federal income tax on forgiven amounts.

President Biden pushed to make this tax exemption permanent by including it in his 2025 fiscal-year budget proposal. While consumer advocates supported the move, Congress did not pass the measure. With President Trump now heading into his administration, there’s no indication the White House will prioritize extending this tax benefit or introducing new legislation to make student loan forgiveness tax-free beyond 2025.

Meanwhile, delays in implementing the one-time Income-Driven Repayment account adjustment and ongoing SAVE plan litigation are slowing down forgiveness timelines. Borrowers who were on track for forgiveness by 2025 may now face delays pushing them into 2026—when forgiven loans could once again be subject to federal income tax.

This combination of legislative uncertainty and program delays makes it more important than ever for borrowers to understand their eligibility, how the American Rescue Plan impacts their loans, and what steps they can take to avoid unnecessary financial stress.

Related: How IRS Insolvency Affects Student Loan Forgiveness Taxes

The American Rescue Plan Act (ARPA) is a federal law passed in 2021 as part of the pandemic-related COVID-19 stimulus efforts. While it included broad economic relief measures like stimulus checks, expanded unemployment benefits, and health care funding. Its most significant impact on higher education was making most forgiven federal student loans tax-free from 2021 to 2025.

This tax exemption applies to loan forgiveness programs, including Income-Driven Repayment plans, closed school discharges, and other federal debt forgiveness initiatives. Borrowers no longer need to worry about a “tax bomb” on forgiven amounts, which would have been considered part of their gross income under normal federal income tax rules.

Although ARPA’s tax benefit for student loans is temporary, it represents a major shift in how education loan forgiveness is treated by the IRS, offering borrowers critical financial relief during a challenging time.

ARPA fundamentally changed the financial outlook for student loan borrowers by eliminating federal taxes on most forgiven student loans from 2021 through 2025.

Here’s how it impacts borrowers:

• Eliminates Taxable Income on Forgiven Loans: Before ARPA, forgiven loans—such as those under Income-Driven Repayment plans—were regarded as taxable income, frequently leading to large tax bills.

• Applies to Multiple Forgiveness Programs: This tax exemption covers loan forgiveness through IDR plans, closed school discharges, and other federal forgiveness initiatives.

• Relieves Borrowers of the “Tax Bomb” Burden: Borrowers no longer need to prepare for a large tax liability when their loans are forgiven, removing a major source of financial stress.

Important Note: ARPA does not change how forgiveness works—it only alters the tax consequences. This adjustment ensures borrowers can move forward without additional financial burdens after achieving loan forgiveness.

What Happens After 2025?

After 2025, whether you’ll owe taxes on forgiven student loans depends entirely on the type of forgiveness you receive.

Here’s a breakdown:

• Public Service Loan Forgiveness (PSLF): Remains tax-free under separate laws, regardless of when you qualify. You won’t face a tax bill, even after the current rules change.

• Income-Driven Repayment (IDR) Forgiveness: Forgiveness under IDR plans could be treated as taxable income. That means if you qualify for forgiveness in 2026 or later, the IRS might consider the amount forgiven as part of your income for that year.

• Total and Permanent Disability (TPD) Discharge: Forgiveness through a TPD discharge remains entirely tax-free.

This makes the type of forgiveness—and when you qualify for it—an important factor in planning your student loan repayment strategy. If you’re relying on Income-Driven Repayment forgiveness, it’s worth staying updated on potential policy changes or extensions that could impact whether forgiven loans remain tax-free.

Let’s look at three borrowers to see how timing and the type of forgiveness they qualify for can affect taxes:

1. Forgiveness in 2025: Maria has been on an Income-Driven Repayment plan for 20 years and qualifies for forgiveness in November 2025. Because this falls before the end of the tax exemption, the forgiven balance isn’t taxable, and Maria doesn’t owe anything extra at tax time.

2. Forgiveness in 2026: James qualifies for Income-Driven Repayment Forgiveness in February 2026. Since the tax exemption has expired, the IRS treats his forgiven $30,000 as taxable income. Depending on his tax bracket, this could mean a significant tax bill.

3. Public Service Loan Forgiveness in 2026: Emily works for a nonprofit and qualifies for PSLF in July 2026. Her forgiven balance is tax-free because PSLF forgiveness isn’t affected by the expiration of the ARPA provision.

If you’re nearing student loan forgiveness, it’s more important than ever to have a plan. With the tax exemption for forgiven loans set to expire after 2025 and uncertainty surrounding future policies, here are some steps to consider:

1. Check Your Forgiveness Timeline: Look at your repayment plan and how close you are to qualifying for forgiveness. If delays, like litigation over the SAVE plan or processing backlogs, are pushing your timeline past 2025, you may want to explore other options.

2. Evaluate Your Repayment Plan: Switching to a plan like Income-Based Repayment could preserve progress toward forgiveness while avoiding further delays caused by SAVE litigation. Consult with a student loan expert or servicer to confirm how changes might affect your timeline. Related: What You Should Know About Your Repayment Plans

3. Monitor Policy and Program Updates: Stay informed about changes to the one-time IDR account adjustment and PSLF processing under a new administration. If you qualify for forgiveness soon, make sure it’s processed before the end of 2025 to avoid a potential tax hit.

4. Consult a Tax Professional: If your forgiveness is likely to occur in 2026 or later, start preparing for a potential tax bill now. A professional can help you estimate your tax liability and plan accordingly.

The uncertainty surrounding the future of student loan forgiveness and its tax treatment makes this a critical time to evaluate your options. With potential delays from the SAVE plan litigation and changes in forgiveness timelines, understanding how these factors affect your specific situation is key to avoiding unnecessary financial stress.

Whether you’re approaching forgiveness or planning for the years ahead, speaking with a student loan expert can help you navigate these challenges. An expert can provide clarity on your repayment plan, tax implications, and how to position yourself for the best outcome under current policies.

Take the next step toward securing your financial future by booking a consultation today.

Related reading:

• Tax Implications of Settling Student Loan Debt

• Filing Taxes With Student Loans

• How to Stop Student Loans From Taking Taxes

• When and How to File Taxes Separately as a Married Couple

• Parent PLUS Loan Tax Deduction