Student Loan Forgiveness Will Trigger Steep Tax Bills in 2026

Millions on income-driven plans could face surprise IRS bills
Posted Sep 3, 2025 5:56 AM CDT
Student Loan Forgiveness Will Trigger Steep Tax Bills in 2026
Stock photo.   (Getty Images/alfexe)

Millions of student loan borrowers could be blindsided by a hefty tax bill under President Trump's sweeping "One Big Beautiful Bill"—and most have no idea it's on its way. Nestled in the bill is a provision that will make forgiven federal student loan debt taxable income again starting in 2026, reversing pandemic-era relief that had shielded borrowers from surprise taxes. The move will hit more than 12 million borrowers on income-driven repayment (IDR) plans, with financial experts warning that many could face "tax bombs" in the range of $7,000 to $12,000, depending on their forgiven balances and incomes, per Quartz.

Here's how the math works: If a teacher earning $50,000 gets $40,000 in student loan forgiveness, her taxable income for the year jumps to $90,000, potentially adding more than $9,000 to her federal tax bill—and possibly thousands more in state taxes in five states that currently tax forgiven debt. The average loan balance for students signed up for an IDR plan is about $57,000, higher education expert Mark Kantrowitz tells CNBC. While some forgiveness programs, like Public Service Loan Forgiveness, will remain exempt, most IDR borrowers aren't so lucky.

The bill also reworks student loan repayment options, including replacing current IDR plans with the new Repayment Assistance Plan (RAP), which offers forgiveness only after 30 years instead of 10 to 25. Grad PLUS loans and some Biden-era protections are on the chopping block, too, while new limits on borrowing and eligibility for forgiveness programs could make footing the college bill even tougher for families. Experts advise borrowers to start planning for possible tax hits now: Save a little extra, do the math on potential tax bills—Yahoo notes you can research tax brackets and rates here—and rethink discretionary spending to cushion the blow.

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