Your student loan was forgiven last year — hurray! But wait. Do you owe taxes?
As we head into the 2025 tax filing season, some borrowers may wonder whether their federal student loan forgiveness is tax-free. After all, under the Biden administration, over five million debtors with about $184 billion in debt were forgiven.
Biden accomplished this through the American Rescue Plan (ARPA), a law passed during the pandemic, which promised that federal student loans would be "free from taxes" for a while, right? Well, somewhat.
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If your federal student loan was forgiven, depending on where you live, you may still be subject to state taxes, and the law that provides for tax-exempt federal student loan forgiveness expires after this year.
Additionally, incoming President Donald Trump has had a mixed record regarding education policy. In the past, he reportedly cut funding to the Public Service Loan Forgiveness (PSLF) program. He has also called for eliminating the U.S. Department of Education. So, what happens with student loans in the second Trump administration is up in the air.
Read on for more of what you need to know.
Is student loan forgiveness taxed in 2025?
Federally forgiven student debt is not taxable on your federal return through the end of this year. That's because ARPA made federal student loan forgiveness tax-free through 2025.
After that, a forgiven loan will again count toward taxable income on federal returns.
Affected loans may include:
- Pay As You Earn (PAYE), which limits federal student loan payments to 10% of a borrower’s discretionary income.
- Saving on a Valuable Education (SAVE) plan, which calculates your loan’s monthly payment amount based on income and family size (currently stalled in court — more on that later).
- Public Service Loan Forgiveness (PSLF), a program that forgives the balance on Direct Loans.
Student loan debt and state taxes
As mentioned, most canceled student debt is currently exempt from federal tax, but only some states follow that federal law.
As a result, you could be stuck with an unexpected state tax bill for forgiven student loan debt, which could be as high as $1,100 in some states.
Check out your state’s Department of Revenue website to determine if you’ll be taxed on student loan forgiveness.
Trump and student loan forgiveness
Parts of the SAVE plan are currently contested in a federal lawsuit. Repealing the plan could mean borrowers will face higher monthly student loan payments if forced to switch to another, more expensive alternative.
Additionally, after 2025, students will again pay taxes on their forgiven federal student loan debt unless Congress acts.
So, where does Trump historically stand on student loans? Well, it’s…complicated.
- According to the National Association of Student Financial Aid Administrations, Trump reduced funding for federal student aid programs like PSLF and Federal Work Study (FWS) during his first presidency.
- However, the then-president also signed a memorandum for federal student loan forgiveness owed by veterans with severe disabilities.
- Trump also worked with the Department of Education by signing an executive order to increase student loan transparency and require colleges and universities to share a portion of the financial risk of student loan debt.
More recently, the president-elect has called for the end of the Department of Education, which manages federal student loans, among many other things. (A similar proposal is in Project 2025, a massive document many see as a playbook for the incoming administration.)
Trump argues that the move would cut costs and return control to the states, potentially reshaping education in the U.S. Those on the other side say that eliminating the Department of Education could harm vulnerable students, disrupt crucial funding, and weaken school civil rights enforcement.
They contend such a move wouldn't significantly increase local control, as states already manage most educational decisions. Instead, it could lead to losing valuable expertise and oversight in the national education system.
While eliminating the department would require congressional approval, Trump could significantly alter its functions through executive actions.
That could include redirecting funds, changing policies on issues like gender identity in schools, and pushing for more local control of education. However, it's important to note that the specifics and full extent of these or other potential changes are still uncertain.
Potential student loan tax benefits
We may need to wait out the next 100 days for a concrete answer on future student loan policy. In the meantime, if you don't qualify for student loan forgiveness, here are a few things you can do for potential tax savings on your debt:
- Ask your employer about any qualified educational assistance programs or a 401(k) student loan match.
- Take the student loan interest deduction, if applicable.
- If you have a 529 account, claim up to $10,000 (lifetime limit) to help pay off college debt.
Finally, visit your state’s Department of Revenue website to ensure you are taking advantage of any further potential state-level tax savings. And stay tuned for unfolding events on Capitol Hill.
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