Hoping for student-loan forgiveness? Get ready for a higher tax bill.
On Wednesday, a new report from advocacy group Protect Borrowers showed the impact of the “tax bomb” borrowers now face, following the expiration of a 2021 provision that made student-loan forgiveness tax-free.
In one example, Protect Borrowers estimated that a married couple with two children earning $60,000 a year would face about $7,200 in additional federal taxes and lost credits if they had about $50,000 in student debt forgiven. Across the scenarios it modeled, the additional cost ranged from about $6,000 to $12,000.
The analysis was based on 2026 federal tax rules and used the average student-loan balance canceled under an income-driven repayment plan, which forgives student debt after 20 or 25 years, depending on when borrowers first took out their loans.
“Congress designed the Income-Driven Repayment programs with the promise of debt relief so that borrowers are not forced to carry the weight of their student loans for their entire lives,” said Jennifer Zhang, policy analyst at Protect Borrowers. “But that promise means little if Americans who finally reach the finish line face a massive tax bill that keeps them trapped in debt.”
Former President Joe Biden’s American Rescue Plan exempted forgiven debt from federal income tax. That provision expired in 2025, meaning borrowers who qualify for relief are now on the hook for the taxes that come with it.
The analysis said that borrowers in the South, including Louisiana, Mississippi, and Arkansas, are expected to see the largest tax increases because they typically have larger balances and lower incomes.
Borrowers previously told Business Insider that they’re concerned about larger, looming tax bills. For example, Misty Knapp said she was just six payments away from debt relief but is worried about affording the taxes that would come with it.
“I don’t know what that’s going to look like, but if I’m taxed on the amount that’s forgiven, that would be a lot of money,” Knapp said.
Democratic lawmakers have also pushed to restore the tax-free provision. Last year, a group of them sent a letter to the Treasury Department citing an earlier analysis from Protect Borrowers, which estimated that a borrower on an income-driven repayment plan who receives debt relief could face losses between $5,800 and $10,000.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers,” the lawmakers wrote.
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