Forgiveness "Tax Bomb" Calculator
This calculator estimates the federal income tax you would owe on forgiven student loan debt. Enter your projected forgiven balance and marginal tax rate. On $120,000 forgiven at 22%, the tax bill reaches $26,400. The ARPA exemption expired December 31, 2025, so IDR forgiveness from 2026 onward is taxable. PSLF remains tax-free.
Estimated tax on the forgiven balance
On forgiven — an effective of the amount written off.
- Federal taxat the marginal rate you entered
- State tax
- Total bill
- Set aside each monthstarting now, no interest assumed
- Debt written off, after tax
Put aside every month — about a week — and the bill is covered when it lands.
The American Rescue Plan Act's exclusion for forgiven student debt expired on 31 December 2025, so income-driven forgiveness is federally taxable again from 2026. Public Service Loan Forgiveness and total and permanent disability discharge are treated differently. States set their own rules. This is a marginal-rate estimate, not tax advice — confirm with a tax professional.
How the 2026 Forgiveness Tax Works
From 2021 through 2025, the American Rescue Plan Act (ARPA §9675) excluded forgiven student loan balances from federal gross income. That provision expired on December 31, 2025, and Congress did not extend it. Starting in 2026, any balance forgiven under an income-driven repayment plan—including RAP, IBR, ICR, or the former PAYE—is treated as ordinary income in the year of discharge.
States that follow rolling federal conformity generally mirror this treatment automatically, adding a state income-tax layer on top. States that use static conformity to a pre-2021 code never excluded the forgiveness in the first place, so nothing changes there. A handful of states have enacted their own exclusions. Check your state’s conformity status before assuming the federal calculator captures your full liability. For borrowers with large balances on long IDR horizons, the tax bill can rival the original principal—which is why planning ahead matters more than ever.
Refinancing to Avoid the Tax Bomb: The Real Trade-Off
Some borrowers consider refinancing to a private loan specifically to escape the forgiveness tax. The logic: pay the balance in full at a lower rate instead of waiting decades for forgiveness and then owing the IRS. On paper this can work—if your rate drops enough to make full repayment cheaper than the forgiven amount plus its tax bill.
But refinancing federal loans into a private loan is irreversible. You permanently give up income-driven repayment under RAP or IBR, Public Service Loan Forgiveness, federal forbearance and deferment, and death and total-and-permanent-disability discharge. Borrowers on student-loan forums report that this trade-off is most painful when income drops unexpectedly after the switch. The refinance break-even calculator can model the interest savings side; this page models the tax side. Compare both before deciding. If your forgiveness timeline is under 10 years or your balance is modest, full repayment may win. If it is 20+ years with a six-figure balance, the math is less clear.
Tax rates used are illustrative. PSLF, Teacher Loan Forgiveness, and Total and Permanent Disability discharge remain tax-free regardless of the ARPA expiry. Consult a tax professional for your situation.
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Sources
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Sources: ARPA §9675 expiry (Dec 31, 2025); Forbes / Robert Farrington (Dec 30, 2025); kitces.com OBBBA guide; michigan.gov/treasury (Feb 2026); studentloansherpa.com tax-bomb preparation.
- Federal Direct Consolidation Loan interest rate — the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of one percent (Federal Student Aid, studentaid.gov, Loan Consolidation).
- Amortisation, daily interest accrual and payoff arithmetic — standard loan mathematics; every figure on this page is computed from the numbers you enter.