Student loan forgiveness is taxable again: How to prepare

Student loan borrowers whose debts are canceled after 2026 could face a hefty tax bill.

The law protecting student loan forgiveness from taxation at the federal level, part of the American Rescue Plan Act of 2021, expired on December 31, 2025. President Donald Trump’s “big, beautiful bill” did not extend or make this provision permanent.

As a result, some borrowers who recently received education loan forgiveness or who plan to receive forgiveness in the future should take steps as soon as possible to prepare, experts say.

This tax change applies to the Department of Education’s Income-Driven Repayment Plans (IDR). Established in the 1990s, IDR plans limit people’s monthly payments to a percentage of their discretionary income and forgive the remaining debt after a set period of time (usually 20 or 25 years).

“A lot of people are approaching the age of 20 or 25,” said Ethan Miller, a certified financial planner and founder of Planning for Progress in the Washington area. Miller specializes in student loans.

“These are the people who really need to think about what impact this so-called tax bomb will have,” he said.

The Public Service Loan Forgiveness Program is a program for government and nonprofit employees that forgives their federal loans after making 120 qualifying monthly payments and remains tax-free.

The federal tax bill for student loan forgiveness could be huge. Higher education expert Mark Kantrowitz said the average loan balance for borrowers enrolled in IDR plans is about $57,000.

Kantrowitz estimates that for those in the 22% tax bracket, that exemption would result in a tax liability of more than $12,000. Low-income earners, those in the 12% tax bracket, would still owe about $7,000.

Additionally, some borrowers may end up paying state taxes on their forgiven balances, experts say.

More than 42 million Americans have student loans, totaling more than $1.6 trillion in debt.

The new potential tax liability comes at a time when many student loan borrowers are facing delays in debt forgiveness. However, in a recent settlement between the American Federation of Teachers and the Trump administration, Education Department officials made it clear that borrowers who qualify for student loan forgiveness in 2025 will not owe federal taxes on the relief, even if their debts are officially forgiven later.

That means if you receive confirmation that you’re eligible for debt cancellation in 2025, you should keep a record of that date, said Nancy Nearman, assistant director of New York’s Education Debt Consumer Assistance Program.

That document could prove that you were eligible for relief before the tax exemption expired, Nearman said.

Landon Warmand, CFP and certified student loan specialist at Reliance Financial Services in Kansas City, Missouri, said that starting in 2026, student loan forgiveness will be counted as income, which could result in “higher taxes,” depending on the balance forgiven.

That could increase your tax bill and affect your eligibility for various credits and deductions, he said.

“The biggest thing I would stress to borrowers is if you know this is going to happen, be proactive and plan for it,” said Warmundo, who is also a member of CNBC’s Financial Advisor Council.

First, you need to know when you are eligible for an IDR plan exemption. Experts say this could be even more difficult without the tracking tools previously available on StudentAid.gov, which were removed earlier this year.

According to a December court filing, the Department of Education “has no plans to resume use of this tool at this time.”

However, you can work with your advisor to determine when you qualify for the exemption and begin estimating the tax impact based on your income for the year. You can then start setting aside money and explore your IRS payment plan options.

“We need to prepare for these tax burdens,” Warmund said. But you can “plan ahead.”