Key facts
- Student-loan borrowers may face significantly higher tax bills on forgiven debt after a tax-free provision expires.
- A report by Protect Borrowers estimates additional federal taxes and lost credits could range from $6,000 to $12,000 per borrower.
- The analysis is based on 2026 federal tax rules and assumes debt forgiveness under income-driven repayment plans.
- The expiration of the American Rescue Plan's exemption for forgiven debt means borrowers will be responsible for taxes on relief received after 2025.
- Borrowers in Southern states like Louisiana, Mississippi, and Arkansas are projected to face the largest tax increases due to typically larger balances and lower incomes.
Student-loan borrowers who receive debt forgiveness in the coming decade may face substantially higher tax bills following the expiration of a provision that made such relief tax-free. A new report from the advocacy group Protect Borrowers highlights the potential financial impact, estimating that the "tax bomb" could add thousands of dollars in federal taxes and lost credits for individuals and couples.
The analysis, based on projected 2026 federal tax rules, models scenarios where borrowers under income-driven repayment (IDR) plans, which forgive debt after 20 or 25 years, could owe between $6,000 and $12,000 more in taxes. For instance, a married couple with two children earning $60,000 annually and having $50,000 in debt forgiven could face approximately $7,200 in additional taxes and lost credits.
Jennifer Zhang, a policy analyst at Protect Borrowers, stated that the promise of debt relief through IDR programs is diminished if borrowers face a "massive tax bill" upon reaching the finish line. The exemption for forgiven debt, initially part of former President Joe Biden's American Rescue Plan, expired in 2025. Borrowers in Southern states, such as Louisiana, Mississippi, and Arkansas, are expected to experience the largest tax increases due to typically higher loan balances and lower incomes.
Concerns about these looming tax bills have been voiced by borrowers, including Misty Knapp, who expressed worry about affording the taxes associated with her impending debt relief. Democratic lawmakers have also urged the Treasury Department to reinstate the tax-free provision, arguing that taxing IDR beneficiaries undermines the program's purpose.