Student Loan Tax Bomb Calculator

Student Loan Tax Bomb Calculator

When your loans are forgiven after 20/25 years, the IRS may treat it as income. Are you ready?

$
$

Average payment over remaining term.

Combined Federal + State marginal rate.

Note on SAVE Plan: The SAVE plan waives 100% of unpaid interest. If checked, your balance will not grow even if your payment is low.

The 2026 Cliff

For years, student loan forgiveness on IDR plans was considered taxable income. The "American Rescue Plan" paused this tax from 2021-2025. If you get forgiveness in 2026 or later, you need to prepare for a bill.

The Escape Hatch: Insolvency

The IRS isn't totally heartless. They have a rule called the Insolvency Exception (Form 982).

How Insolvency Works
  • Step 1: Calculate Net Worth immediately before forgiveness. (Assets - Liabilities).
  • Step 2: If you have negative net worth (insolvent), you can subtract that amount from the taxable forgiveness.
  • Example: You have $50k forgiven. Your Net Worth is -$40k. You only pay taxes on $10k ($50k - $40k).
Case Study: The "Forever Renter"

Lisa has $100k in loans forgiven. She rents her apartment and has $5k in savings.

Assets: $5k (Savings) + $3k (Car) = $8k.
Liabilities: $100k (Loans).
Insolvency: $92k ($100k - $8k).

Result: She excludes $92k from taxes. She only pays tax on the remaining $8k. The "bomb" is diffused.

Planning FAQ

Does my state tax forgiveness?

Most states follow federal rules, but a few (like Mississippi, North Carolina, Wisconsin, Indiana, Arkansas) have historically decoupled and may tax it regardless of federal law. Check with a local CPA.

Can I use a payment plan for the tax?

Yes. The IRS allows installment agreements (up to 72 months) or Offer in Compromise if you truly cannot pay.