Student loan borrowers whose remaining balances are forgiven in 2026 and beyond could face significant federal and, in some cases, state tax bills after a temporary break expired at the end of 2025, according to financial advisers and policy analysts.
Why It Matters
The American Rescue Plan Act of 2021 temporarily made most student loan forgiveness tax-free, but that federal protection lapsed on December 31, 2025, meaning canceled debt under income-driven repayment plans will count as taxable income starting this year.
Advocates and several U.S. senators warned that the resulting liabilities—that experts have described as a “tax bomb”—could undercut relief for borrowers who have made payments for 20 or 25 years under federal income-driven repayment programs.
What To Know
Beginning January 1, 2026, student loan amounts forgiven through Department of Education income-driven repayment (IDR) plans are treated as taxable income at the federal level, potentially pushing borrowers into higher tax brackets and affecting eligibility for other credits and deductions.
Public Service Loan Forgiveness, which cancels federal loans for qualifying government and nonprofit workers after 120 qualifying payments, remains tax-free, as do certain other discharges such as teacher loan forgiveness, death and disability, and borrower defense.
Analysis by Protect Borrowers, a nonprofit organization aimed at protecting borrowers of student loans, estimates net losses of roughly $5,800 to more than $10,000 for a typical borrower after taxes and lost credits. Numerous Democratic lawmakers, including Senators Elizabeth Warren of Massachusetts and Bernie Sanders, from Vermont, penned a letter in late 2025 to Treasury Secretary Scott Bessent, warning the expiration of tax-free forgiveness could punish borrowers with “massive tax bills.”
Some borrowers may also owe state taxes, as treatment of forgiven student debt varies by state.
Borrowers who were deemed eligible for forgiveness in 2025 will not face federal taxes on that relief—even if discharges occur later—under a settlement between the American Federation of Teachers and the Department of Education, and consumer advocates advised saving dated eligibility records.
What People Are Saying
Ethan Miller, a certified financial planner and founder of Planning for Progress, told CNBC: “A lot of people are very close to their 20- or 25-year mark,” for reaching forgiveness. “Those are the folks who really need to be thinking about how the so-called tax bomb…is going to impact them.”
Democratic lawmakers wrote in their letter: “By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers. Instead of compounding this problem by denying legally owed IDR discharge to borrowers, the administration can and should deliver certainty and relief to these families as soon as possible.”
What Happens Next
Borrowers who expect IDR forgiveness will likely need to consult advisers to estimate timing, model tax impacts, and consider setting aside funds or using IRS payment plans to manage potential liabilities.
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