Student loan forgiveness becomes taxable again in 2026, triggering a costly tax bomb for IDR borrowers
Student loan borrowers whose remaining balances are cancelled from 2026 onwards may face significant federal tax bills after a temporary tax shield expired at the end of 2025. The change affects millions enrolled in income-driven repayment plans, raising concerns about affordability and financial preparedness.The federal exemption that allowed student loan forgiveness to remain tax-free lapsed after lawmakers failed to extend a provision introduced under the American Rescue Plan Act of 2021. President Donald Trump’s legislative package did not renew the measure, leaving cancelled student debt taxable once again.Why student loan forgiveness is taxable againThe tax change applies to income-driven repayment plans, commonly known as IDRs, run by the US Department of Education. These plans cap monthly payments at a portion of discretionary income and forgive remaining balances after 20 or 25 years.Ethan Miller, a certified financial planner, said many borrowers are nearing the end of those repayment timelines. “Those are the folks who really need to be thinking about how the so-called tax bomb is going to impact them,” Miller said in conversation with CNBC.Public Service Loan Forgiveness, which cancels federal loans for eligible government and non-profit workers after 120 qualifying payments, remains exempt from federal taxation.The size of the potential tax billThe financial impact could be substantial. Mark Kantrowitz, a higher education expert, said the average balance for borrowers enrolled in IDR plans stands at about $57,000. For someone in the 22% tax bracket, that level of forgiveness could generate a federal tax bill exceeding $12,000, Kantrowitz told CNBC. Borrowers in the 12% bracket could still owe around $7,000.State taxes may add further costs in jurisdictions that treat forgiven student debt as taxable income. More than 42 million Americans currently hold student loans, with total outstanding balances exceeding $1.6 trillion.Special treatment for borrowers eligible in 2025Borrowers who became eligible for forgiveness before the tax exemption expired may still avoid federal taxes. Education Department officials clarified the position following a settlement with the American Federation of Teachers.Nancy Nierman said borrowers should retain dated confirmation of eligibility. That documentation may prove crucial in establishing entitlement before the exemption ended, Nierman said during an interview with CNBC.Planning for forgiveness taxesFrom 2026, cancelled student loans will count as taxable income, potentially pushing borrowers into higher tax brackets. Landon Warmund, a certified financial planner, warned that the change could also affect eligibility for deductions and credits. “If you know this is going to come, be proactive with the planning,” Warmund said, quoted by CNBC.Tracking eligibility may prove harder after the Education Department removed its online IDR forgiveness counter. Officials said in a court filing that there are no plans to restore the tool. Financial advisers say borrowers can still estimate timelines, set aside funds, and explore IRS payment plans to manage future liabilities.
