Student loan borrowers whose debt is canceled in 2026 or later may face a significant tax bill, as a law that shielded student loan forgiveness from taxation at the federal level has expired. The American Rescue Plan Act of 2021, which provided this protection, was not extended or made permanent by President Donald Trump’s administration.<\/p>\n
The taxation change applies to the Department of Education’s income-driven repayment plans, or IDRs, which cap people’s monthly payments at a share of their discretionary income and excuse any remaining debt after a certain period, typically 20 or 25 years. According to Ethan Miller, a certified financial planner and founder of Planning for Progress, “A lot of people are very close to their 20- or 25-year mark,” and these individuals need to be thinking about how the so-called tax bomb is going to impact them.<\/p>\n
Public Service Loan Forgiveness, a program for government and nonprofit employees that eliminates federal loans after 120 qualifying monthly payments, remains tax-free. However, the federal tax bill on student loan forgiveness could be substantial, with the average loan balance for borrowers enrolled in an IDR plan being around $57,000, according to higher education expert Mark Kantrowitz. For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of more than $12,000, while lower earners, or those in the 12% tax bracket, would still owe around $7,000.<\/p>\n
Additionally, some borrowers could incur state tax liability on their forgiven balance, experts say. With over 42 million Americans holding student loans and the outstanding debt exceeding $1.6 trillion, it is essential for borrowers to understand the tax implications of student loan forgiveness. <\/p>\n
In a recent settlement between the American Federation of Teachers and the Trump administration, Education Department officials clarified that borrowers who became eligible for student loan forgiveness in 2025 won’t owe federal taxes on the relief, even if their debt isn’t officially discharged until later. Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York, advises borrowers to save any dated records confirming their eligibility for debt cancellation in 2025, as these documents may be used to prove entitlement to the relief before the tax-free provision lapsed.<\/p>\n
Starting in 2026, student loan forgiveness counts as income, which could “thrust your tax bracket up,” depending on the size of your eliminated balance, according to CFP and certified student loan professional Landon Warmund. To prepare for the tax implications, borrowers should know when they are eligible for IDR plan forgiveness and start estimating the tax impact based on that year’s income. They can then begin setting money aside and explore IRS payment plan options.<\/p>\n