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Student loan borrowers who are eligible for debt relief but fail to obtain it under the Trump administration could face “a huge tax liability,” the American Federation of Teachers said in new court documents.
The teachers’ union, which represents around 1.8 million members, began legal agendas for the U.S. Department of Education in March, and is currently seeking a class action lawsuit situation.
The AFT says Trump officials have denied borrowers access to student loan waiver programs, including income-driven repayment plans, or IDRs. These plans link borrowers’ monthly bills to their income, leading to the cancellation of their obligations after a certain period of time.
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“(a) NY borrowers who are eligible to cancel a loan under an IDR plan, such as an IBR, but whose cancellation is withheld by the department, risk that this cancellation will be taxed as federal income if the cancellation is not processed prior to January 1, 2026,” Filing Filing Filing reads.
The U.S. Department of Education did not respond to a request for comment.
Here’s what borrowers need to know:
Student loan forgiveness will be taxed again soon
The law that protected student loan forgiveness from taxation has expired this year.
The 2021 American Rescue Plan Act exempts student loan forgiveness at the federal level until the end of 2025. President Donald Trump’s “Big Beautiful Building” did not extend or permanently extend the expansion or permanent provisions.
Without action from Congress, student loan borrowers who have allowed debt under the U.S. Department of Education’s income-driven repayment plan, or IDR, will face federal tax bills once again in 2026. An IDR plan charges monthly payments on one share of discretionary income and caps remaining debts after a certain period, usually 20 or 25 years.
Even under current law, borrowers could face state tax bills depending on where they live.
At the same time, the delay in forgiveness
If student loan forgiveness takes time to be tax-free at the federal level, hundreds of thousands of borrowers who have requested to register in repayment plans that lead to debt cancellations will fall into Limbo under the Trump administration.
Court records show that as of July 31, more than 1.3 million borrowers were trapped in the IDR Plan Application backlog. Meanwhile, 72,730 people are awaiting determination to forgive a public service loan status. PSLF leads to the forgiveness of public servants and certain nonprofit workers 10 years later.
Unless the US Department of Education “acts promptly” to allow eligible borrowers’ debts, they could “face important tax bills on debt relief that should be granted to them without penalty,” I-Vt. senators, including Senator Bernie Sanders of the Communist Party, wrote in a letter to Education Secretary Linda McMahon.
Loan exemption tax liability can be material
The tax bill on student loan forgiveness is substantial.
The average loan balance for borrowers enrolled in the IDR plan is around $57,000, higher education expert Mark Kantrowitz recently told CNBC.
For people with a 22% tax bracket, Kantrowitz estimated that allowance would result in a tax burden of more than $12,000. Lower earners, or 12% tax bracket earners, still borrow about $7,000.
More borrowers could be in the hook for state taxes. Many states reflect the federal tax policy on student loans. This means more states could start collecting aid next year as well, experts say.
Debt relief granted under the Public Service Loan Exemption Program is not subject to federal taxes, but borrowers may be owed state bills.
What to do about possible tax bills?
Nancy Nieman, assistant director of the Education Debt Consumer Assistance Program in New York, said:
“If necessary, they can use this information to prove they are entitled to forgive in a non-taxable year,” Nierman said.
For borrowers who are anticipating relief after January 1, 2026, Nearman recommends that they begin planning a tax bill by paying for the money during preparation.
Borrowers often don’t have to pay the entire tax bill for one amount, she added.
“They can request plans through the IRS and spread payments over the long term,” Nieman said. On the other hand, if your liabilities exceed your assets or you are dealing with serious financial difficulties, you may be able to cut or eliminate the bill completely, she said.
