Student loans and year-end tax planning — what borrowers need to know
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Recent legislation and policy changes under the Trump administration have upended federal student loans.
For some borrowers, these changes could affect their tax situation — how much they owe the IRS or whether they actually receive the expected tax refund.
More than 40 million Americans have student loans, with outstanding debt exceeding $1.6 trillion.
The taxability of student loan forgiveness is changing. A law that shields student loan forgiveness from taxation at the federal level (a provision included in the American Rescue Plan Act of 2021) expires at the end of 2025. President Donald Trump’s “big, beautiful bill” did not expand or make permanent this policy. However, it made student loan forgiveness tax-free in cases of death or disability.
As a result, student loan borrowers whose debts were forgiven after December under the U.S. Department of Education’s income-driven repayment plans, or IDRs, will again face a federal tax bill. IDR plans limit people’s monthly payments to a portion of their discretionary income and cancel any remaining debt after a certain period of time (usually 20 years or 25 years).
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.
Here’s what borrowers need to know about how recent policy changes may affect their taxes and four year-end steps to take:
1. Gather records that show you are eligible for forgiveness
Borrowers who qualify for student loan forgiveness in 2025 or expect to receive it before the end of the year “should keep all payment records with their servicer,” said Nancy Nierman, deputy director of the Education Debt Consumer Assistance Program in New York.
“If necessary, they can use this information to prove that they are entitled to amnesty for a year in which they are not taxable,” Nierman said.
2. Plan a state tax bill for forgiveness.
Even those who received student loan forgiveness this year may still owe taxes to their state, Kantrowitz said. He said five states currently impose a tax on aid in certain situations: Arkansas, Indiana, Mississippi, North Carolina and Wisconsin.
Borrowers should review their state’s specific rules so they can begin making a plan to prepare for any bills.
3. Calculate your student loan interest deduction
Recent tax legislation hasn’t affected this long-standing hiatus: Borrowers can deduct interest payments on private or federal student loans by up to $2,500 from their taxable income each year. You’ll want to calculate how much you can claim as 2025 comes to a close.
Depending on your tax bracket and how much interest you pay, the student loan interest deduction can be up to $550 a year, Kantrowitz said. The cut is:”“above the line” means you don’t need to itemize your taxes to claim it.
But there are income limits. The deduction is starting to phase out or decrease for people with a modified adjusted gross income of $85,000 for 2025, Kantrowitz said. The phaseout for married couples filing jointly starts at $170,000.
4. Stay current to avoid tax refund seizure
Borrowers who have defaulted on their student loan debt should take steps now to get up to date and prevent the government from seizing some or all of their tax refunds.
The Trump administration announced that it will restart collections on April 21, not long after the 2025 tax season. More than 5 million debtors is currently in the default state.
Your entire federal tax refund, including refundable credits, could be seized for a past-due student loan, Kantrowitz said.
You can contact the government Default Solution Group and enrolling in an income-driven repayment plan, or credit rehabilitation.
“If a borrower currents their account, that could stop the Treasury from offsetting tax refunds,” Kantrowitz said.
Borrowers may also try to adjust their paycheck withholdings to reduce the likelihood of a large tax refund, but you’ll want to be careful about this. Your withholding complies with IRS rulesKantrowitz added.
