Student loan forgiveness is taxable again: what dentists should plan for

This page is general education, not tax advice. Tax law changes, and your own bill depends on your whole return. Use it to size the problem, then take the numbers to a CPA.

What changed on Jan. 1, 2026

The American Rescue Plan Act made most student loan forgiveness tax-free for discharges in 2021 through 2025. The IRS lists that exclusion as covering discharges “before January 1, 2026.” It wasn’t extended.

So from 2026 on, forgiven federal student loan debt is generally cancellation-of-debt income unless another exclusion applies. For dentists, that mostly means forgiveness at the end of an income-driven plan. That’s 30 years on RAP, or the end of an older plan such as IBR.

What’s still tax-free

• PSLF. Forgiveness after 120 qualifying payments at a government or 501(c)(3) employer stays tax-free. See PSLF for dentists.
• Death or total and permanent disability. IRS Publication 4681 says these discharges may be nontaxable. For discharges after 2025, you must include a valid Social Security number on your return.
• Certain loan repayment programs. The IRS also excludes amounts paid under certain student loan repayment assistance programs. Check the specific program’s tax treatment before you sign.

State taxes: check your state

Your state may or may not follow the federal rule. Look up your state revenue department’s guidance, or ask your preparer, in the year before any forgiveness.

The math: how big is a dentist’s tax bomb?

Forgiveness is added to your income in the year it happens. On a dentist’s income, much of it would be taxed at a high marginal rate. The examples below assume $300,000 at 8.07% on RAP, and a 35% combined rate on the forgiven amount. That rate is an assumption for illustration, not a forecast.

Scenario (30 years on RAP)	Paid over 30 years	Forgiven at year 30	Tax at an assumed 35%
AGI flat at $220,000	about $660,000	about $282,000	about $99,000
AGI starts at $150,000, rises 3% a year	about $714,000	about $165,000	about $58,000
AGI starts at $220,000, rises 3% a year	about $720,000	$0 (paid off in about 23 years)	$0

Why the balance barely moves: at 8.07%, interest on $300,000 is about $2,018 a month. RAP waives what your payment doesn’t cover and adds a $50 principal match. So the balance falls only about $50 a month until your payment passes the interest. See RAP, explained for dentists.

The honest read: the tax bomb is real, but it’s paid with 30-year-old dollars. It also sits decades out, and the tax law could change again before then. In either direction.

The insolvency exclusion

You don’t have to include canceled debt in income to the extent you were insolvent immediately before the cancellation. Insolvent means your total liabilities were more than the fair market value of all your assets.

The IRS insolvency worksheet in Publication 4681 counts:

• Liabilities including the student loan being forgiven, mortgages, car loans and business debts.
• Assets including cash, the full market value of your home and other real estate, retirement accounts (IRA and 401(k)), pensions, and the value of a business such as a practice.

You claim it by attaching Form 982 to your return. You also must reduce certain tax attributes, such as carryovers and the basis of assets, by the amount you exclude.

For a dentist late in a career, retirement savings and practice value usually outweigh the remaining debt. So plan as if insolvency won’t apply, and treat it as a possible bonus.

Who should plan for this, and who shouldn’t worry

Plan for a tax bill if:

• You’re on RAP or IBR outside PSLF, and your balance isn’t shrinking much.
• Your projected payments never pass the monthly interest on your balance.

You probably don’t need to if:

• You’re on track for PSLF. That forgiveness is tax-free.
• Your income will grow enough to pay the loan off before forgiveness. Then there’s nothing to forgive.
• You’ve refinanced. Private loans aren’t eligible for federal forgiveness at all.

Planning options

1. Build a side fund. Set money aside every month in a taxable investment account earmarked for the bill. To reach $100,000 in 30 years:

• at an assumed 6% annual return: about $100 a month
• at an assumed 4% annual return: about $144 a month

Actual returns can be lower. Recheck the target every few years as your balance and tax rate change.

2. Compare the whole cost, not just the payment. Forgiveness plus tax can still cost less than paying in full. It can also cost more than refinancing to a lower rate and paying off in 10 years. Run your numbers in the refinance vs forgiveness tool.

3. Reconsider PSLF. If a qualifying job is realistic for 10 years, it removes the tax question entirely.

4. Think before refinancing. Refinancing turns federal loans into private ones. It ends access to RAP, PSLF, federal forgiveness, and federal deferment and forbearance for those loans. That trade can make sense for a high earner who’d pay the loan off anyway. See Refinance vs PSLF vs RAP.

What to do next

1. Figure out which path you’re on: PSLF, long-term RAP or IBR, or payoff.
2. If it’s long-term forgiveness, project your balance at year 30 with the refinance vs forgiveness tool.
3. Multiply the forgiven amount by a conservative tax rate to size the bill.
4. Start a side fund sized to that bill, and revisit it every few years.
5. In the year before forgiveness, see a CPA about the insolvency exclusion and your state’s rules.