Student loan forgiveness notices go out — next steps for borrowers

Student loan forgiveness is a major relief for borrowers — many of whom have been in repayment for decades. But after receiving debt cancellation, there are key steps you should take, experts say.

The Trump administration agreed last month to resume forgiving people’s education debts under programs that it had partially paused, including the Income Contingent Repayment plan, or ICR, and the Pay as You Earn plan, or PAYE. The concessions resulted from a lawsuit by the American Federation of Teachers against the U.S. Department of Education, which accused the government of blocking borrowers from opportunities mandated in their loan terms.

Even during the government shutdown, some student loan borrowers have started receiving messages that the Education Department has forgiven their debt.

More than 40 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion. 

“A financial windfall is a great time to evaluate progress towards life goals,” said Dana Levit, a certified financial planner and the owner of Paragon Financial Advisors in the Boston area. “In this case, there is now additional discretionary income that had previously been used for making payments on the student loan debt.”

Here’s what to do after student loan forgiveness, according to experts.

In some cases, getting your student debt erased can trigger tax liabilities. However, the American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025.

Recently, Trump officials made clear that borrowers who become eligible for debt erasure in 2025 won’t get a tax bill from the IRS, even if their debt is formally cancelled in the first few weeks or months of next year. Sometimes there can be a lag time between when someone becomes eligible for the relief and when their debt is actually wiped away.

It’s a good idea to save any dated notification you get about your eligibility for loan cancellation, in case you wrongly receive a tax bill down the line, experts say.

If you become eligible for student loan forgiveness in 2026, you’ll get a copy of IRS Form 1099-C showing the amount cleared as income, said higher education expert Mark Kantrowitz.

Those who anticipate the debt erasure next year can start to salt away money now for the federal tax bill. Borrowers often don’t have to pay the entire tax liability in one sum, said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.

“They can request a plan through the IRS to spread the payments over a longer period of time,” Nierman said.

Meanwhile, if your liabilities exceed your assets or you’re dealing with a serious financial hardship, you may be able to reduce or eliminate the federal tax bill altogether, she said.

Borrowers who receive student loan forgiveness this year or in the future may also owe taxes to their state, Kantrowitz said. Currently, five states tax the relief in certain cases, he said: Arkansas, Indiana, Mississippi, North Carolina and Wisconsin.

Any student loan borrower who gets their debt forgiven should keep records confirming their eligibility for the relief and that their debt balance was reset to zero, Kantrowitz said. You can find information on your account status at Studentaid.gov and with your loan servicer.

If you don’t know which company is managing your student loans on behalf of the Education Department, or need the company’s contact information, you can also get that information from the government.

“Keep this proof of forgiveness indefinitely,” Kantrowitz said, in case your loan servicer makes a mistake and restores the debt to your name or it remains on your credit report.

Your credit history should reflect the student loan forgiveness within a few months, Kantrowitz said.

“If it doesn’t, they should contact their loan servicer,” he said.

If you continued to make payments on your student debt after you became eligible for forgiveness, the Education Department may owe you a refund.

To see if you qualify for one, count the number of qualifying payments you’ve made and compare it to the required number. For example, those pursuing Public Service Loan Forgiveness must make 120 payments before loan cancellation; the number of payments required under income-driven repayment plans can be 240 or 300.

You should be able to get a list of your qualifying payments at StudentAid.gov, and you can request the refund through the Education Department or your loan servicer. Keep a record of your attempts to get back your overpayments, experts say.

“The refund will be made by ACH or by check from the U.S. Treasury,” Kantrowitz said.

Student loan borrowers who get notified that they’re eligible for debt cancellation can also ask to be placed in a forbearance while their relief is processed.

With your student debt finally gone, you’ll likely find yourself with a few hundred extra dollars a month, said Levit.

“Start with using this surplus cash to build an emergency fund if it doesn’t exist yet,” Levit said.

While financial advisors typically recommend a goal of three to six months’ worth of expenses as an emergency fund, having even $2,000 set aside can make a major difference for many people.

As you get used to life with less debt, you may also want to review your other financial goals, Levit said.

“These could include buying a house, saving for college and saving for retirement,” she said. “This is the time to see if any of these goals are underfunded, and if they are, to use this money to catch up on these targets.”