There are two main ways to receive forgiveness on your federal student loans: 1) Public Service Loan Forgiveness (PSLF); or 2) Reaching the maximum repayment period under an income-driven repayment plan (IDR), like Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), or Saving on A Valuable Education (SAVE, formerly known as Revised PAYE (REPAYE)).
Each income-driven plan has a maximum amount of time that you're allowed to make payments. When you reach the maximum number of payments under a respective IDR, any remaining unpaid interest or principal amount is forgiven. Forgiven or “canceled debt” can be treated as taxable by the IRS (https://www.irs.gov/taxtopics/tc431.html). Your marginal income tax rate in the tax year the debt is forgiven determines how much you'll pay in taxes.
However, The American Rescue Plan Act of 2021 included a provision that specifically exempts forgiven student debt from being treated as taxable income if canceled between 2021 through 2025. Not only is PSLF eligible for non-taxable forgiveness, but reaching forgiveness using an IDR is currently also non-taxable. There is a chance that Congress could extend the forgiveness tax exemption or let it expire after 2025. If your IDR forgiveness will occur beyond 2025, then you should plan for a potential tax on forgiveness unless the law says otherwise.
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IDR Aspects
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IBR 2009
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PAYE
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IBR 2014
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SAVE
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Maximum repayment period (in years)
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25
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20
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20
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25*
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Maximum repayment period (in months)
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300
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240
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240
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300
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Forgiveness taxable
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Yes**
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*SAVE can have a shorter maximum repayment period for borrowers with undergraduate loans only. Anyone with graduate or professional school student loans will have a 25-year maximum repayment period to reach SAVE forgiveness.
**All student loan forgiveness is non-taxable through 2025. Forgiveness for the SAVE (formerly REPAYE), PAYE, and ICR repayment plans is currently blocked. The SAVE plan and forgiveness under the ICR, PAYE, and SAVE are currently blocked pending ongoing litigation.
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How do you know when to expect forgiveness?
It has been difficult to get an accurate count of your forgiveness progress. As part of the one-time forgiveness payment count adjustment announced in 2022, there is a plan to make forgiveness progress easily available. In the meantime, there is a geeky way to review your forgiveness payment count adjustment:
Step 1) Log in to studentaid.gov
Step 2) Go to https://studentaid.gov/app/api/nslds/payment-counter/summary
The data is available only through this API link at this time. It's going to look really ugly as it is not formatted well for viewing.
How do you estimate your potential forgiveness tax?
Estimating your future tax on forgiveness is both art and science. We can make some reasonable assumptions based on historical and current federal and state income tax rates. Student loan forgiveness is not taxable through 2025. Since we don't know the 2026 tax rates yet, we use the posted 2025 federal income tax rate data.
The top tax bracket for 2025 is 37% and begins at incomes over $626,350 for single filers and $751,600 for married joint filers. Keep in mind that tax brackets are also adjusted each year for inflation. For example, in 1995 (30 years ago), the top federal tax bracket started at incomes over $256,500 per year for single filers and was taxed at a rate of 39.6% (higher than the top marginal tax rate today).
For illustration, let’s say you have a total taxable income plus a forgiven student loan balance of $500,000 in 20 years under IBR 2014, and for the sake of simplicity, the federal tax rates and brackets are the same as they are in 2025. Again, the tax brackets are adjusted annually for inflation. When forgiveness occurs, we'll assume you are married and plan to file your taxes jointly.
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Tax bracket for Married Joint Filers
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Calculation
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Tax amount
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First $23,850 is taxed at 10%
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0.10*$23,850
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$2,385
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Amounts between $23,850 and $96,950 taxed at 12%
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0.12*($96,950-$23,850)
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$8,772
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Amounts between $96,951 and $206,700 taxed at 22%
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0.22*($206,700-$96,951)
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$24,145
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Amounts between $206,701 and $394,600 taxed at 24%
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0.24*($394,600-206,701)
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$45,096
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Amounts between $394,601 and $501,050 taxed at 32%
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0.32*($500,000-394,601)
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$33,728
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Amounts between $501,051 and $751,600 taxed at 35%
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0.35*($751,600-$501,051)
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$0
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Amounts over $751,601 taxed at 37.0%
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0.37*($0)
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$0
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Total Tax Amount
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Sum of tax amounts
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$114,126
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Effective Tax Rate
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$114,126/$500,000
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22.8%
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Marginal Tax Rate
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Highest tax bracket
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32.0%
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Under this example scenario, ideally, you would plan to have enough saved to cover the tax liability of $114,126. If you use a very conservative estimate of $115,000 to have on hand for the tax due, you could save $115,000/240 months = $479 per month to cover the tax liability.
Alternatively, you could save for the tax liability using investments (money market, certificate of deposit, equities, bonds, annuities, life insurance, etc, or a combination thereof) in an effort to earn interest on your forgiveness savings. For example, if you were to receive at least a 3% return on your forgiveness savings, you could reduce your $479/month savings plan to $349/month in order to have $115,000 on hand to cover your forgiveness tax liability from the example above.
Estimating your potential forgiveness amounts and planning for a possible tax liability can reduce your overall loan repayment costs substantially.
Let's say you finish veterinary school with $220,000 in federal student loans. If we run a simulation of your repayment using a starting income of $120,000/year increasing by 3% per year and assume a family size of 1 for the duration of repayment using IBR 2014, your total projected repayment costs might be $314,201 assuming a 30% tax on amounts forgiven and a forgiveness savings plan return of 3% per year.
Effective Annual Interest Rate
If you’ve paid $314,201 in total under IBR 2014 including the forgiven amounts, that means you have paid $94,201 in interest over 20 years (amounts above what you borrowed, $314,201 - $220,000 = $94,201). The proportion of your total interest above what you borrowed = $94,201/$220,000 = 0.428. If we annualize that by the 20 years, you paid that loan, your “effective annual interest rate” equals 0.428/20 * 100 = 2.14% per year.
The effective annual interest rate calculation will help you compare repayment under an IDR vs. a private consolidation loan and help you understand how much it costs you to pay your student loans back under income-driven repayment. Oftentimes private consolidation loans will look enticing because of the seemingly lower variable or fixed interest rate that you may qualify for based on your credit history. However, suppose you know how the IDR plans and forgiveness affect your repayment costs. In that case, you can better assess whether or not that private loan refinance offer will save you money or if it actually does make sense to pay more than your minimum monthly income-driven payment requires.