Student loan forgiveness delays may lead to tax bills for borrowers

The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. Trump’s “big beautiful bill” did not extend or make permanent that broader provision.

Without action from Congress, student loan borrowers who get their debt forgiven under the U.S. Department of Education’s income-driven repayment plans, or IDRs, would face a federal tax bill again starting in 2026. 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.

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The recent delays to loan forgiveness are a result of multiple changes. Among them:

• The Education Department said earlier this summer that it was pausing the loan discharge component on the Income Based Repayment, or IBR, plan, while it responds to recent court orders. That freeze remains in place. “They have given no guidance as to when they may resume,” said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.

• Loan forgiveness is also paused on other IDR plans, including the Income-Contingent Repayment, or ICR, plan, the Education Department says. Meanwhile, millions of borrowers enrolled in a new repayment plan — which was supposed to expedite loan forgiveness for many borrowers — under the Biden administration that is now defunct.

• As of the end of July, more than 1.3 million applications were pending at the Education Department from borrowers trying to access an IDR plan, recent court documents show. Many of these borrowers are likely trying to leave a program in which loan forgiveness is paused or unavailable.

Unless the U.S. Department of Education “acts quickly” to forgive the debt of eligible borrowers, they “could face significant tax bills on debt relief that should have been granted to them without penalty,” lawmakers, including Sen. Bernie Sanders, I-Vt., wrote in a letter to Education Secretary Linda McMahon on Monday.

The tax bill on student loan forgiveness can be significant.

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 over $12,000, Kantrowitz estimates. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.

Borrowers could also be on the hook for state taxes. Many states mirror the federal government’s tax policy on student loans, meaning more states may start to levy the aid next year as well, experts say.

Debt relief granted under the Public Service Loan Forgiveness program is not subject to federal taxes, although borrowers may owe their state a bill. As of July 31, there was a 72,730-person backlog of borrowers waiting to have the Department of Education help them access their PSLF loan forgiveness.

Borrowers who expect they’ll become eligible for student loan forgiveness in 2025 “should save all payment records with their servicers,” Nierman said.

“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,” she said.

For borrowers who anticipate the relief after Jan. 1, 2026, Nierman recommends starting to plan for the tax bill by salting away some money when you can in preparation.

Borrowers often don’t have to pay the entire tax bill in one sum, she added.

“They can request a plan through the IRS to spread the payments over a longer period of time,” Nierman said. Meanwhile, if your liabilities exceed your assets or you’re dealing with a serious financial hardship, you may be able to reduce or eliminate the bill altogether, she said.