Student loan forgiveness is taxable again: How to prepare
Songsak Rohprasit | An | Getty Images
Student loan borrowers whose debt is canceled in 2026 or later could face a significant tax bill.
A law that shielded student loan forgiveness from taxes at the federal level, which was part of the American Rescue Plan Act of 2021, expired on December 31, 2025. President Donald Trump’s “big beautiful bill“It did not extend or make permanent this provision.
As a result, some borrowers who have recently received education debt cancellation or expect to do so in the future should take steps as soon as possible to be prepared, experts say.
The tax change applies to Department of Education income-based repayment plans, or IDRs. It came into force in the 90sIDR plans limit people’s monthly payments to a portion of their discretionary income and excuse any remaining debt after a certain period of time (usually 20 or 25 years).
“A lot of people are very close to their 20- or 25-year goal,” said Ethan Miller, a certified financial planner and founder of Progress Planning in the Washington area. Miller specializes in student loans.
“These are people who really need to think about how the so-called tax bomb will affect them,” he said.
Public Service Loan Forgiveness is a program for government and nonprofit employees that eliminates federal loans after 120 monthly payments and is tax-free.
The federal tax bill on student loan forgiveness could be significant. The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said higher education expert Mark Kantrowitz.
Kantrowitz estimated that forgiving that amount for those in the 22% tax bracket would trigger a tax burden of more than $12,000. Low-income earners or those in the 12% tax bracket would still owe around $7,000.
Additionally, some borrowers may incur state tax liability on their forgiven balances, experts say.
More than 42 million Americans have student loans and outstanding debt $1.6 trillion.
Eligibility for student loan forgiveness in 2025
The new potential tax liability comes at the same time that many student loan borrowers are facing delays in accessing debt forgiveness. But in a recent agreement between the American Federation of Teachers and the Trump administration, Education Department officials said borrowers eligible for student loan forgiveness in 2025 He won’t owe federal taxes on the aid, even if his debts aren’t officially paid off until later.
That means if you get confirmation that you’re eligible for debt cancellation in 2025, you should keep that dated record, said Nancy Nierman, deputy director of the Education Debt Consumer Assistance Program in New York.
You can use this document to prove you qualify for assistance before the tax-free arrangement expires, Nierman said.
Prepare for student loan forgiveness taxes
Starting in 2026, student loan forgiveness will count as income, which could ‘put a strain on your finances’ Depending on the size of your eliminated balance, “the tax bracket is increased,” said Landon Warmund, CFP and certified student loan specialist with Reliant Financial Services in Kansas City, Missouri.
That could increase your tax bill and affect eligibility for various deductions and credits, he said.
“The biggest thing I emphasize for borrowers is to be proactive about planning if you know it’s going to happen,” said Warmund, who is also a member of CNBC’s Council of Financial Advisers.
First, you need to know when you qualify for IDR plan forgiveness. This may now be more difficult without the monitoring tool that was previously available. StudentAid.gov, Experts say it was removed earlier this year.
According to December, the Department of Education “has no plans to continue using the tool at this time.” application to court.
However, you can work with an advisor to understand when you’re eligible for forgiveness and begin estimating the tax impact based on that year’s income. You can then start setting aside money and explore IRS payment plan options.
“You need to be prepared for those tax liabilities,” Warmund said. But “you can get ahead of it and plan accordingly.”
