How does the IRS treat student loan interest, employer repayments, and forgiven balances in 2026?
Summary
You can deduct the student loan interest you actually paid, up to $2,500, without itemizing, but for 2026 the deduction shrinks once modified adjusted gross income passes $85,000 ($175,000 on a joint return) and disappears at $100,000 ($205,000 joint), and married people filing separately cannot take it at all. Up to $5,250 a year of loan payments made by your employer through an educational assistance program stays out of your income, now permanently. Forgiven balances lost their blanket federal exclusion after 2025, so a discharge outside Public Service Loan Forgiveness can be taxed, although death and disability discharges remain excluded.
Deducting the interest
The deduction is the smaller of $2,500 or the interest you paid during the year, and prepaid interest counts along with required payments. You have to be legally obligated to pay the interest on a qualified student loan, which the IRS defines as a loan taken out solely for qualified higher education expenses for you, your spouse, or someone who was your dependent when you borrowed. Neither you nor your spouse on a joint return can be claimed as someone else's dependent.
The phaseout ranges moved slightly for 2026. Rev. Proc. 2025-32 sets them at $85,000 to $100,000 for single filers and $175,000 to $205,000 for joint returns, up from $170,000 to $200,000 joint in 2025. Interest on money borrowed from a related person, such as a spouse, sibling, parent, grandparent, or child, is not deductible, and neither is interest on a loan from a qualified employer plan.
What the $600 on Form 1098-E means
A lender or servicer has to file Form 1098-E when it receives $600 or more in interest from one borrower in a year, counting all of that borrower's loans together. That is a reporting threshold for the lender. The deduction itself is based on the interest you paid, so a smaller amount with no form can still count.
For loans made on or after September 1, 2004, box 1 includes capitalized interest and loan origination fees that are charges for the use of money. A check in box 2 means those amounts were left out of box 1 on an older loan. Publication 970 also warns that the split between interest and principal for tax purposes might not match the one on the form.
After a refinance
A loan used only to refinance your own qualified student loan still produces deductible interest, and so does a consolidation loan used only to combine two or more of them. Borrow more than you owed and spend the extra on something other than education, and none of the interest on the new loan is deductible.
When your employer pays
Under Section 127, an educational assistance program can pay principal or interest on your qualified education loans, and the payments are excluded from your income.
- The $5,250 annual cap covers loan payments and other educational assistance together. If your employer pays $2,000 toward your loans, only $3,250 of other assistance can be excluded that year.
- The loan can predate the job.
- The loan-payment option, first allowed for payments after March 27, 2020 and once scheduled to end with 2025, was made permanent by the One Big Beautiful Bill Act.
- The $5,250 figure will be adjusted for inflation starting with 2027.
- Interest your employer paid cannot also go into your own interest deduction.
Forgiven and discharged balances
Canceled debt is generally taxable. The special exclusion for student loan discharges between 2021 and 2025 has ended, so the answer now depends on why the balance went away.
| Why the balance was canceled | Federal income tax |
|---|---|
| Discharge after 360 payments under RAP | May be taxable at the federal and state level; StudentAid.gov carves out only PSLF from this warning |
| Public Service Loan Forgiveness | Not subject to that warning |
| Death or total and permanent disability | Excluded under IRC 108(f)(5) for federal and private education loans, if your Social Security number is on the return |
| Canceled in a Title 11 bankruptcy case | Excluded, with tax attributes reduced on Form 982 |
| Canceled while insolvent | Excluded to the extent you were insolvent |
The Education Department will notify you when a loan becomes eligible for a RAP discharge, and you have 21 days to opt out. A state can treat a disability discharge as income even though the federal rules do not.
Sources
- IRS, irs.gov/taxtopics/tc456
- IRS, irs.gov/pub/irs-drop/rp-25-32.pdf
- IRS, irs.gov/publications/p970
- IRS, irs.gov/instructions/i1098et
- IRS, irs.gov/newsroom/updates-to-frequently-asked-questions-about-educational-assis…
- IRS, irs.gov/taxtopics/tc431
- Legal Information Institute, law.cornell.edu/uscode/text/26/108
- Federal Student Aid, studentaid.gov/announcements-events/big-updates/definitions
- Federal Student Aid, studentaid.gov/manage-loans/forgiveness-cancellation/disability-discharge/taxes
Written by Kaz (pen name). Figures are copied from the sources' published pages on the dates shown. We have not used these products. Corrections: contact form.