Student loan forgiveness is taxable again: How to prepare

Student loan borrowers whose debt is canceled in 2026 or later may face a significant tax bill.

A law that shielded student loan forgiveness from taxation at the federal level — part of the American Rescue Plan Act of 2021 — expired on Dec. 31, 2025. President Donald Trump’s “big beautiful bill” did not extend or make permanent that provision.

As a result, certain borrowers who’ve recently received education debt cancellation or expect to do so in the future should take steps as soon as possible to be prepared, experts say.

The taxation change applies to the Department of Education’s income-driven repayment plans, or IDRs. Enacted in the 90s, IDR plans 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.

“A lot of people are very close to their 20- or 25-year mark,” said Ethan Miller, a certified financial planner and founder of Planning for Progress in the Washington area. Miller specializes in student loans.

“Those are the folks who really need to be thinking about how the so-called tax bomb … is going to impact them,” he said.

Public Service Loan Forgiveness, a program for government and nonprofit employees that eliminates federal loans after 120 qualifying monthly payments, remains tax-free.

The federal tax bill on student loan forgiveness could be substantial. The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said 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, Kantrowitz estimated. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.

Plus, some borrowers could incur state tax liability on their forgiven balance, experts say.

More than 42 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion.

The new potential tax liability comes at the same time many student loan borrowers have faced delays in accessing debt forgiveness. But 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.

That means if you received confirmation that you’re eligible for debt cancellation in 2025, you should save that dated record, said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.

You may be able to use that document to prove you were entitled to the relief before the tax-free provision lapsed, Nierman said.

Starting in 2026, student loan forgiveness counts as income, which could “thrust your tax bracket up,” depending on the size of your eliminated balance, said CFP and certified student loan professional Landon Warmund with Reliant Financial Services in Kansas City, Missouri.

That could increase your tax bill and impact eligibility for various deductions and credits, he said.

“The biggest thing that I’m stressing for borrowers is that if you know this is going to come, be proactive with the planning,” said Warmund, who is also a member of CNBC’s Financial Advisor Council.

First, you’ll need to know when you’re eligible for IDR plan forgiveness. That could now be harder without the tracking tool previously available on StudentAid.gov, which was removed earlier this year, experts say.

The Education Department “currently has no plans to resume using the tool,” according to a December court filing.  

However, you can work with an advisor to figure out when you are eligible for forgiveness and start estimating the tax impact, depending on that year’s income. Then you can begin setting money aside and explore IRS payment plan options. 

“You need to be prepared for these tax liabilities,” Warmund said. But you can “get ahead of it and plan accordingly.”