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The federal tax shield for student loan forgiveness is dead.
On December 31, 2025, the American Rescue Plan Act (ARPA) provision that kept forgiven student loan debt tax-free expired. Congress has not extended it.
For borrowers in Mississippi, North Carolina, Indiana, and Wisconsin, this is not just a policy footnote. It is a financial reversion.
As of January 1, 2026, federal tax treatment of most non-PSLF student loan forgiveness has reverted to pre-2021 rules. If your student loans are forgiven this year, that cancelled debt is treated as ordinary income.
Unless you qualify for a specific permanent exclusion, or can prove insolvency, the Department of Revenue is waiting for its cut.
For borrowers expecting a clean financial reset in 2026, this change alters the math.
The Federal Reversion (1099-C Returns)
The mechanics are cold and automatic. Under IRC Section 61(a)(11), cancellation of debt is generally included in gross income.
When a lender forgives a debt of $600 or more, they are legally required to file IRS Form 1099-C (Cancellation of Debt).
From 2021 through 2025, borrowers could largely ignore this form regarding student loans because ARPA Section 9675 excluded the income federally. That protection is gone.
If you have $50,000 forgiven in 2026, the IRS views it as a $50,000 bonus. It is added to your Adjusted Gross Income (AGI). This can push you into a higher tax bracket and disqualify you from income-based credits.
Crucial Exception: While most income-driven forgiveness is now taxable federally, certain programs like Public Service Loan Forgiveness (PSLF) and specific statutory discharges (like death or total and permanent disability) remain permanently excluded under federal law.
The Geography of the Tax Bomb
Mississippi operates on selective conformity, picking and choosing which parts of the federal tax code to adopt. During the ARPA years, Mississippi did not automatically adopt all federal exclusions and generally taxed discharge-of-indebtedness income absent a specific state exemption.
As of mid-February 2026, the legislature has not passed a new bill to exempt general student loan forgiveness. Without a specific exemption on the books, the Mississippi Department of Revenue treats discharged debt as taxable gross income.
North Carolina uses fixed date conformity. Currently, state tax law aligns with the Internal Revenue Code (IRC) as it existed on January 1, 2023.
The federal code on that date did include the tax exclusion, but the text of that exclusion explicitly stated it would expire on December 31, 2025. This creates a conformity timing issue.
Because North Carolina conforms to the IRC as of January 1, 2023, including the built-in December 31, 2025 sunset, the exclusion is no longer in effect unless the General Assembly passes a specific modification.
The Indiana Anomaly Indiana presents a grim irony for 2026. For years, the state was an outlier, aggressively forcing borrowers to “add back” federally tax-free forgiveness into their state taxable income. That unique mechanism is now obsolete. Because the federal government has resumed taxing this debt, Indiana no longer needs a special rule to reach into your wallet. It happens automatically through your federal AGI. The bureaucratic route has changed, but the financial injury remains identical: You will owe state income tax on every dollar forgiven.
Wisconsin Like North Carolina, Wisconsin uses fixed-date conformity, currently aligning with the federal code as of December 31, 2022. The expiration date was baked into the code Wisconsin adopted.
While legislative proposals to update the tax code are common, no bill has been enacted to specifically extend the student loan tax holiday for 2026. Until the Governor signs such a bill, the Wisconsin Department of Revenue must enforce the tax.
Despite their differing bureaucratic paths, selective conformity in Mississippi, fixed-date deadlines in North Carolina and Wisconsin, or Indiana’s historic aggression, the destination is identical. In all four states, the state tax code has effectively weaponized the expiration of the federal holiday. Whether by active enforcement or passive expiration, the Department of Revenue views your cancelled debt not as relief, but as revenue.
To use Form 982, you need a snapshot of your finances immediately before the forgiveness event. Gather these 3 numbers now:
- Total Debt: Include the student loan itself, credit cards, mortgage, and medical bills.
- Total Assets: Include home value, car value, and 401(k) balance.
- The Date: You must prove these values existed the day before the discharge.
The “Insolvency” Lifeline (IRS Form 982)
If you are staring at a tax bill you cannot pay, there is one permanent provision in the tax code that might help. It is not a new law; it is IRC Section 108(a)(1)(B), commonly known as the Insolvency Exclusion.
The rule is simple in concept but difficult in execution: You do not have to pay taxes on forgiven debt if you were “insolvent” immediately before the forgiveness happened.
“Insolvent” means your total liabilities exceeded your total assets.
The Calculation You must list everything you own. This is where borrowers get tripped up.
- Assets: You must include the value of your home (not just the equity), your car, your savings, and, crucially, your retirement accounts (401k, IRA).
- Liabilities: Student loans, credit cards, mortgages, car notes, medical debt.
If your liabilities were $200,000 and your assets were $150,000, you are insolvent by $50,000. If $40,000 of student loans is forgiven, the exclusion may apply up to the amount of documented insolvency.
This is not automatic. You have to file the form.
Note: The exclusion only applies up to the amount you were insolvent. Any excess forgiven debt remains taxable.
The Burden of Proof Is on You
The legislative landscape is fluid. State legislatures are currently in session, and tax bills can move quickly.
Do not rely on headlines from last year. Log into your account at studentaid.gov to confirm your exact forgiveness date. If your discharge happened on or after January 1, 2026, you are in the new tax reality.
Check the Department of Revenue website for your specific state before filing your 2026 return. If the tax bill is substantial, pay a CPA to run the insolvency numbers for you. The cost of a professional review is often a fraction of the tax liability you might avoid.
The window has closed. If your loan balance disappears tomorrow, treat it like a winning lottery ticket that you can’t cash but must report. Ignoring the 1099-C isn’t an option; the IRS receives the same copy you do. Prepare for the bill now, or the interest on your tax debt will eventually rival the student loans you just escaped.
This article is for informational purposes only and reflects current tax law as of publication. Verify your specific situation with a qualified tax professional.
Sarah Johnson is an education policy researcher and student-aid specialist who writes clear, practical guides on financial assistance programs, grants, and career opportunities. She focuses on simplifying complex information for parents, students, and families.
