Doctors face high student debt, which often takes years, if not decades, to repay. Because of this, many physicians, dentists and veterinarians look into student loan forgiveness to find relief. However, many borrowers may not realize that there can be tax implications associated with loan forgiveness.

This is a very important aspect to know as you pursue forgiveness so you can prepare for what has become known as the “student loan tax bomb.” Here’s what you need to know about the possibility of tax on student loan forgiveness and how borrowers can prepare for it.

The Basics Of Taxes On Student Loan Forgiveness

The IRS considers any kind of debt forgiveness, cancellation, reduction or discharge as taxable income.

If you have debt forgiven, your lender should provide a Form 1099-C during the tax season in the year after your debt was changed. This form requires you to report the removed debt as income, which can result in higher than normal income taxes.

But does this apply to student loans? As of writing, the answer is no. Student loan borrowers who have their debt forgiven before 2026 will not pay federal income taxes on their forgiven balance, but tax on student loan forgiveness will resume in just a few years.

Temporary Tax Exemption On Student Loan Forgiveness

Under the American Rescue Plan Act of 2021, both federal and private student loan forgiveness was made exempt from federal tax until the end of 2025. This exemption includes both the Public Student Loan Forgiveness and Income-Driven Repayment programs.

Only borrowers who complete their 10, 20 or 25 years of repayment (based on their repayment plan) before December 31, 2025 will receive this tax exemption.

Though forgiveness is exempt from federal tax, it is not necessarily exempt from state income tax. Though a majority of states either don’t have income tax or are following the federal government’s lead to waive taxes on forgiveness during this time, borrowers in Indiana, North Carolina, Mississippi, Arkansas, California, and Wisconsin may face state income tax on their forgiveness. Consult with a tax professional to understand how/if this may impact you.

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Will The Temporarily Tax Exemption Be Extended?

The student loan forgiveness tax exemption provision is set to end at the end of 2025, but it could be extended or made permanent through federal legislation. Borrowers should not approach their forgiveness with the assumption or hope that the exemption will be extended.

Tax On Federal Student Loan Forgiveness After 2025

The student loan forgiveness tax exemption ends on December 31, 2025. After the exemption period ends, taxes on forgiveness will depend on the forgiveness program.

Public Service Loan Forgiveness

PSLF is a great student loan forgiveness option for doctors, especially physicians. Many physician jobs qualify for this program, and physicians can often begin working toward their 10 years of payments while in residency.

So, are student loans forgiven under Public Service Loan Forgiveness taxable? Student loans forgiven under PSLF are not taxable by the federal government even after the exemption period ends, but your state may require you to include forgiveness when calculating your income tax.

See Also: Public Service Loan Forgiveness For Doctors – Physicians, Dentists & Veterinarians

Income-Driven Repayment

If doctors don’t qualify for PSLF, they may consider using an IDR plan to receive forgiveness. Using one of these plans means the borrower will have their remaining balance forgiven after making 20 or 25 years of payments — loan term depends on the IDR plan.

Once the exemption period ends, any loans forgiven through income-driven repayment programs will be taxed both federally and at a state level (if applicable).

Not sure how to handle your student loans? Get expert guidance tailored to your needs.

Are There Any Exceptions To Tax On Student Loan Forgiveness?

There is one primary exception to the tax on student loan forgiveness, insolvency. Insolvency is when a person’s total debts exceed their total assets.

Some borrowers may qualify for the “insolvency exception,” which means they are not required to pay tax on forgiven debt if they can prove they were insolvent at the time of forgiveness.

How Much Tax Will I Need To Pay On My Student Loan Forgiveness?

Determining how much tax you will pay on forgiveness depends on many factors like income at the time of forgiveness, tax bracket, filing status (single, married filing separately, married filing jointly, etc.), and more.

Because forgiveness will count as income, there is the chance that your forgiveness could push you into a higher tax bracket, meaning you will pay more taxes. This could be likely for doctors, because doctors’ loan balances are often above six figures.

To find how much you will owe after student loan forgiveness, add your income and the value of student loans you expect to have forgiven. Subtract any applicable deductions to find your taxable income, then use the tax brackets below to calculate how much you will owe.

A tax expert can help you determine how much tax you will need to prepare for once your student loans are forgiven. Get connected to an accountant or tax advisor for free with Build Your Team.

Example: A doctor makes $200,000 per year, is single, and claims the standard deduction of $12,400. The doctor’s taxable income is $187,600, which puts them in the 32% tax bracket. Using the 2023 tax brackets below, the doctor would owe $38,864.

After completing an IDR plan, the doctor has the remaining $150,000 of their loan balance forgiven. This increases their taxable income to $337,600, pushing them into the 35% tax bracket and raising the doctor’s income taxes to $90,054.50 — an increase of $51,190.50.

This dramatic increase illustrates why doctors may want to prepare ahead of time for the taxes they will owe on forgiveness.