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Recent legislation and policy changes under the Trump administration have upended federal student loans.
For some borrowers, the shifts may affect their tax situation — how much they owe the IRS, or whether they actually get an expected tax refund.
More than 40 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion.
Taxability of student loan forgiveness is changing. A law that shielded student loan forgiveness from taxation at the federal level — a provision in the American Rescue Plan Act of 2021 — expires at the end of 2025. President Donald Trump’s “big beautiful bill” did not extend or make permanent that policy. It did, however, make student loan forgiveness tax-free in cases of death or disability.
As a result, student loan borrowers who get their debt forgiven under the U.S. Department of Education’s income-driven repayment plans, or IDRs, after December will again face a federal tax bill. IDR plans cap people’s monthly payments at a share of their discretionary income and cancel any remaining debt after a certain period, typically 20 years or 25 years.
The federal tax bill on student loan forgiveness can 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.
Here’s what borrowers need to know about how recent policy changes may affect their taxes, and four year-end steps to take:
1. Gather records showing forgiveness eligibility
Borrowers who became eligible for student loan forgiveness in 2025 or expect to before year-end “should save all payment records with their servicers,” said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.
“If necessary, they can use this information to prove they were entitled to forgiveness during a year in which it is not subject to tax,” Nierman said.
2. Plan for a state tax bill on forgiveness
Even those who receive student loan forgiveness this year may still owe taxes to their state, said Kantrowitz. Currently, five states tax the relief in certain cases, he said: Arkansas, Indiana, Mississippi, North Carolina and Wisconsin.
Borrowers should look into the particular rules of their state so that they can start making a plan to be prepared for any bill.
3. Calculate your student loan interest deduction
Recent tax legislation hasn’t affected this longstanding break: Borrowers can deduct up to $2,500 in interest payments made on private or federal student loans from their taxable income each year. As 2025 wraps up, you’ll want to figure out how much you can claim.
Depending on your tax bracket and how much interest you paid, the student loan interest deduction could be worth up to $550 a year, Kantrowitz said. The deduction is “above the line,” meaning you don’t need to itemize your taxes to claim it.
There are income limits, however. For 2025, the deduction starts to phase out, or get smaller, for individuals with a modified adjusted gross income of $85,000, Kantrowitz said. For married couples filing jointly, the phaseout begins at $170,000.
4. Get current to avoid tax refund seizure
Student loan borrowers who are in default should take steps now to get current and avoid the government seizing some or all of their tax refund.
The Trump administration announced that it would resume collections on April 21, not long after tax season in 2025. More than 5 million borrowers are currently in default.
Your entire federal tax refund, including any refundable credits, can be seized for a past-due student loan, Kantrowitz said.
You can contact the government’s Default Resolution Group and pursue a number of different avenues to get current on your loans, including enrolling in an income-driven repayment plan or signing up for loan rehabilitation.
“If a borrower brings their account current, that can stop the Treasury offset of their tax refunds,” Kantrowitz said.
Borrowers in default can also try to adjust their paycheck withholdings to reduce the likelihood of a large tax refund, but you’ll want to be careful that your withholding complies with IRS rules, Kantrowitz added.