Some Student Loan Borrowers Could Face Up to $12,000 in Extra Federal Taxes

Some student loan borrowers whose remaining balances are forgiven could owe thousands more in federal taxes, with certain borrowers facing nearly $12,000 in added costs, according to a new report from Protect Borrowers.

The nonprofit says borrowers who receive forgiveness through income-driven repayment, or IDR, may see about $6,000 to almost $12,000 in extra federal taxes and lost tax credits, depending on income and household size.

A temporary federal exemption that kept many forms of canceled student debt from being treated as taxable income applied to discharges after December 31, 2020, and before January 1, 2026. But that protection was not extended for IDR forgiveness beyond 2025.

“Depending on the amount forgiven and the borrower's income, their tax amount could significantly increase, as any amount covered from income-driven repayment plans would be taxable,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.

“The result could be a tax bill double or triple the usual one an individual would face and would create an extra burden at a time when many Americans are feeling the sting of inflationary pressures all around them.”

Why It Matters

Income-driven repayment plans are intended to make federal student loan payments more manageable by tying monthly bills partly to income and family size. Under many of these plans, borrowers can have any remaining balance forgiven after 20 or 25 years of qualifying payments.

For borrowers nearing the end of that process, the disappearance of a $50,000 student loan balance does not necessarily mean the federal government views it as a no-cost event.

In general, the IRS treats canceled or forgiven debt as taxable unless an exception applies. When canceled debt is taxable, it is usually reported as income for the year the cancellation happens.

For five years, student loan borrowers benefited from an unusually broad exception, but those financial consequences may now be returning.

What To Know

Protect Borrowers estimates that 2 million to 3 million borrowers could become eligible for IDR cancellation over the next decade and may be exposed to the resulting federal “tax bomb.”

“This has been a growing concern since a provision with excluded student loan forgiveness from any type of tax expired, leading the way for future debt elimination amounts to become taxable income,” Beene said.

Nearly 13 million Americans are currently enrolled in IDR plans and building progress toward possible cancellation, according to the report.

How Much More Could Student Loan Borrowers Pay?

Not every borrower who receives student loan forgiveness will automatically owe $12,000 to the government.

Protect Borrowers modeled several scenarios using a national average canceled IDR balance of $49,697 and borrowers earning $40,000, $60,000 or $80,000. It then measured the impact for single borrowers without children, single parents with two dependents and married couples with two dependents.

For a single borrower earning $60,000, the report estimates a federal tax bill of $15,303 after the modeled loan cancellation, compared with $4,720 if the canceled debt were not taxed. That is an extra $10,583 in taxes.

At $80,000 of income, the report estimates additional costs ranging from $5,964 for a married borrower with two dependents to $11,641 for a single borrower without dependents.

“Not all loans are equal. IDR forgiveness is generally taxable beginning in 2026, meaning the amount of the loan forgiven could push up your taxable income and leave you with a tax bill many likely cannot afford to pay,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.

“This is another bill coming due for some borrowers, potentially requiring additional interest and penalties, almost like a never-ending story for some.”

Lower-income families could be especially affected because adding forgiven debt to taxable income can also change their eligibility for tax credits.

Why Did Student Loan Forgiveness Become Taxable Again?

Congress included Section 9675 in the American Rescue Plan Act in 2021. The provision generally excluded qualifying student loan discharges from federal taxable income for cancellations occurring after December 31, 2020, and before January 1, 2026.

Congress later made the tax exemption permanent for loans canceled because of death or total and permanent disability, but did not similarly extend the broad exemption for IDR cancellation beyond 2025, according to Protect Borrowers.

Public Service Loan Forgiveness is handled differently. Loans discharged through PSLF are still excluded from federal taxable income.

Which Borrowers Could Be Hit Hardest?

The financial effect may also differ sharply by state and household.

Protect Borrowers found that borrowers in the South could see some of the biggest increases because many Southern states combine relatively larger IDR balances with lower incomes.

For married borrowers with two dependents using each state's median income and average IDR cancellation, the study found some of the largest increases in:

• Louisiana: $7,668 in additional taxes and lost credits.
• Mississippi: $7,303.
• Arkansas: $6,830.
• West Virginia: $5,883.
• Oklahoma: $5,885.
• New Mexico: $5,932.

Even so, the largest numbers of potentially affected borrowers over the next decade are in Texas, with up to 275,000; California, up to 271,000; Florida, up to 221,000; New York, up to 172,000; and Ohio, up to 135,000.

“The reality is, many borrowers have been making payments for decades, and now that they are finally reaching the point of forgiveness, they could be met with another substantial bill. Imagine having $100,000 in student loans forgiven, only to find out that the IRS now considers that amount taxable income,” Thompson said.

“For many, this simply shifts the debt from one place to another. Instead of owing the Department of Education, you now owe the IRS.”

What Happens Next

Congress could remove the issue by again excluding IDR forgiveness from federal taxable income, and Protect Borrowers has urged lawmakers to make forgiveness through both existing IDR programs and the newer Repayment Assistance Plan permanently exempt from federal income tax.

Democratic lawmakers were already pressing the Trump administration on the issue before the midterms.

With Democrats now set to control both chambers of Congress, legislation addressing the tax treatment could have a clearer route through Capitol Hill, though President Donald Trump would still have the power to veto any bill.

“With a new Congress soon to take power, this may be one of many policy revisions they look to make to ensure borrowers in the future won't have a tax shock,” Beene said.