Student loan forgiveness will cost you, again.
In 2021, Congress had exempted canceled federal student debt, including balances canceled under income-driven repayment (IDR) plans, from being subject to federal income tax. However, the provision expired at the end of 2025, making canceled student debt balances taxable again as income starting this year.
That extra income from student loan forgiveness on IRS tax forms could double or even triple tax bills, a study from nonprofit advocacy group Protect Borrowers said. As many as 3 million middle- and working-class families would be hit hardest over the next decade, it said.
Additionally, nearly 13 million Americans, or almost half of all federal student loan borrowers in repayment, are enrolled in IDR
plans and making progress toward potential cancellation, it said.
"This tax bomb will force millions of working-class families, who have been diligently making payments for two decades or more, to trade their student loan debt for debt to the IRS,” said Jennifer Zhang, policy, research, and data analyst at Protect Borrowers and author of the report.
How big are taxes from student loan forgiveness?
Borrowers who earn IDR cancellation could see tax increases of roughly an additional $6,000 to nearly $12,000 depending on their income, tax status and family size, Protect Borrowers estimated.
Here are some examples:
- Single borrowers without children could see about 1 out of every 4 dollars of their salary go to federal taxes. These borrowers would pay the highest taxes at each income tier: a single borrower earning $40,000 would pay over $10,000 in federal taxes; a single borrower earning $60,000 would pay over $15,000 in federal taxes; and a single borrower earning $80,000 would pay nearly $20,000 in federal taxes. After accounting for payroll and state taxes, these borrowers could effectively see their take-home income cut nearly in half.
- Families could lose tax credits, such as the earned income tax credit and child tax credit, they would have otherwise been eligible for without the additional income from student loan forgiveness. The average married borrower who earns IDR cancellation and has two dependents normally would receive a tax credit of $3,102, but with canceled student debt as income, it would cost them $7,206 in lost credits and additional taxes, while only earning $60,000 annually to support a household of four.
- Low-income families would lose the most. A typical family of four earning just $40,000 annually would usually receive a tax credit of $8,854. Instead, the canceled student debt would cost them $10,558 in lost credits and additional taxes. Their tax liability would grow to more than 11 times what it usually is.
Is forgiveness worth it?
Yes, student loan cancellation is usually still worth it, experts said.
"For most borrowers pursuing IDR forgiveness, a taxable forgiveness event is still financially advantageous," said Stacey MacPhetres, senior director of education finance at Bright Horizons, a provider of educational advisory services. "Even if a borrower owes taxes on the forgiven amount, the resulting tax bill is typically far smaller than the balance that was discharged."
Here's an example:
Pay the Loan
- Remaining student loan balance: $30,000
- Borrower pays off the entire balance.
- Total cost: $30,000
Receive IDR forgiveness
- Remaining balance forgiven: $30,000
- Forgiveness is taxable.
- Assume tax bill of $5,000-$7,000
- Total cost: $5,000-$7,000, not $30,000.
"The borrower comes out far ahead even after paying taxes," she said. "The primary challenge is not the size of the tax relative to the forgiven debt, but the need to pay a potentially large one-time tax bill when filing taxes when forgiveness occurs."
What should people do?
For those planning for IDR forgiveness, borrowers should be reminded, MacPhetres said:
- Begin to set aside funds in advance of tax filing.
- Forgiveness can create a substantial tax liability.
- Taxes are generally due with their tax return the following spring (i.e. if forgiveness occurs in 2026, the borrower will generally report that income on their 2026 tax return, filed in April 2027)
- Estimate forgiveness amount and consult with tax preparer to estimate tax liability.
What if I can't pay the tax bill?
The IRS offers payment plans, but interest and penalties may continue to accrue. Some plans also require set up fees.
Is IRS debt worse than student loan debt?
It depends, said Richard Pon, a certified public accountant in San Francisco. Here's how he sees it:
IRS debt is worse sometimes:
- Interest is added daily to the balance, allowing interest to compound and balances to grow quickly, compared to simple interest for student loans. Student loan interest is only calculated on the principal balance.
- If the IRS garnishes your wages or seizes assets.
- If the IRS interest rate is higher than federal undergraduate loans, which is generally the case.
Student debt is worse sometimes:
- Because graduate loans and definitely private loans will exceed the IRS interest rate
Is any tax-free forgiveness available?
Tax-free student loan cancellation is still available in some instances, Pon said, such as:
1. In cases of insolvency or bankruptcy
2. When public loan service forgiveness is available
3. Under the National Health Service Corps loan repayment program and certain state loan repayment programs that generally require someone to work in an area that has a shortage of medical professionals
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Student loan forgiveness is a ticking tax bomb again, study warns
