Student loan forgiveness is taxable. How to plan for the IRS bill
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Many student loan borrowers who have their loans forgiven in 2026 can expect a hefty tax bill next year. That’s because a law that protected the tax cut at the federal level, which was part of the American Rescue Plan Act of 2021, expired in December.
Borrowers most affected will be those whose debts are exempt under the U.S. Department of Education’s income-driven 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 wipe out the remaining debt after a certain period of time, usually 20 or 25 years.
More than 12 million student loan borrowers are enrolled in IDR plans, according to higher education expert Mark Kantrowitz.
Because forgiven federal student debt may now be treated as income by the IRS, the tax liability can be significant.
The average loan balance for borrowers enrolled in an IDR plan is around $57,000, Kantrowitz said. 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.
As a result, experts say those expecting student loan forgiveness this year should start planning now for the bill. Here’s what you can do.
Eligibility date and type of loan forgiveness are very important
New potential tax liability for many student loan borrowers They faced delays in accessing the debt forgiveness to which they were entitled. But in a recent agreement between the American Federation of Teachers and the Trump administration, Education Department officials announced that borrowers who qualify for student loan forgiveness in 2025 will not owe federal taxes because of the relief. — even if their debts are not later officially paid.
This means that if you received confirmation that you were 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.
How to prepare for the federal tax bill
“Large balances will be forgiven” for some student loan borrowers, certified financial planner and certified student loan specialist says Landon Warmund is with Reliant Financial Services in Kansas City, Missouri.
recently application to courtThe Trump administration said in January that more than 40,000 borrowers eligible for federal student loan forgiveness had been identified.
He said borrowers may also face other tax consequences because forgiven balances may be considered regular income starting this year. For example, giving forgiveness can push you into a higher tax bracket, said Warmund, who is also a member of CNBC’s Council of Financial Advisors.
Additionally, many tax deductions, including the student loan interest deduction, are reduced or eliminated when income exceeds certain thresholds.
You can work with a financial advisor or tax professional who will consider all of these factors to estimate your future tax bill, said Ethan Miller, CFP, founder of Planning for Progress in the Washington, D.C.-area. Miller specializes in student loans.
You’ll also want to evaluate whether you owe any taxes to your state, as some have their own tax policies regarding aid.
“Hopefully you’ll take the amount you’re paying on your loans and put that aside and start saving some money,” Miller said.
But even with advanced planning, some low-income earners may struggle to save enough before next year’s tax bill, he added.
What to do if you can’t afford the tab?
Typically, the deadline for taxes to be paid (which would be April 15, 2027), but some borrowers Miller said the IRS payment plan.
If your total tax liability, including your balance, penalties, and interest, is $50,000 or less and your tax returns are current, short-term (180 days or less) or monthly payment plan through your IRS online account, according to the agency.
However, fees may apply depending on the length of your payment plan. Additionally, penalties and interest may accrue until the balance is paid in full.
Finally, other borrowers who are in financial difficulty can also apply for a loan. Compromise OfferIt may result in the IRS allowing you to pay a smaller amount than what you owe.
