Student loan forgiveness is back on the tax radar, and borrowers expecting relief in 2026 could face a five-figure surprise from the IRS.
The federal tax break tied to the American Rescue Plan Act of 2021 expired in December, which means forgiven balances may now count as taxable income. As a result, many borrowers enrolled in income-driven repayment plans could see a significant bill next year.
Most affected borrowers are in IDR plans, which cap monthly payments based on discretionary income and forgive remaining balances after 20 or 25 years. These plans date back to the 1990s and currently serve more than 12 million people, according to higher education expert Mark Kantrowitz.
Because forgiven federal student debt may now be considered income by the IRS, the tax liability can be substantial.
“The average loan balance for borrowers enrolled in an IDR plan is around $57,000,” Kantrowitz said. For someone in the 22% tax bracket, that could mean a tax bill of more than $12,000. Borrowers in the 12% bracket would still owe roughly $7,000, he estimated.
So planning ahead matters. Experts say borrowers expecting student loan forgiveness in 2026 should start setting aside money now or adjust withholdings to soften the blow. Some may also qualify for IRS payment plans if they cannot afford the full amount upfront.
Timing also plays a key role. In a recent settlement between the American Federation of Teachers and the Trump administration, Education Department officials clarified that borrowers who became eligible for student loan forgiveness in 2025 will not owe federal taxes on the relief, even if the discharge happens later.
That documentation is critical.
“If you received confirmation in 2025 that you’re eligible for debt cancellation, you should save that dated record,” said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York. “You may be able to use that document to prove you were entitled to the relief before the tax-free provision lapsed,” she said.
For borrowers counting down to forgiveness, the next move is clear. Celebrate later. Plan now.
