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Student Loan Forgiveness Now Taxable

Starting in 2026, certain types of student loan forgiveness will once again be counted as taxable income. The change affects borrowers under the U.S. Department of Education’s income-driven repayment (IDR) plans, which cap monthly payments based on discretionary income and forgive remaining balances after 20 or 25 years.

The American Rescue Plan Act of 2021 temporarily shielded forgiven student debt from federal taxes, but that provision expired on December 31, 2025. As a result, borrowers whose loans are canceled in 2026 or later could face a significant tax bill, potentially impacting both federal and state tax obligations.

Public Service Loan Forgiveness (PSLF), which forgives loans for government and nonprofit employees after 120 qualifying payments, remains tax-free.

Potential Tax Impact on Borrowers

More than 42 million Americans hold student loans, with outstanding debt exceeding $1.6 trillion. For borrowers enrolled in IDR plans, the average balance is around $57,000. Under federal tax rules, someone in the 22% bracket would owe more than $12,000 on that forgiven balance, while borrowers in the 12% bracket would still face roughly $7,000 in taxes. Additional state taxes could further increase the liability.

Certified financial planners warn that borrowers nearing the 20- or 25-year mark for forgiveness are especially at risk. “Those are the folks who really need to be thinking about how the so-called tax bomb is going to impact them,” said Ethan Miller, a CFP specializing in student loans.

Transitional Relief for 2025 Eligibility

Borrowers who became eligible for student loan forgiveness in 2025 will not owe federal taxes on their relief, even if the loans are not discharged until later. Keeping documentation confirming eligibility in 2025 will be critical to proving tax-free status, according to experts.

Planning Ahead for 2026

Financial advisors emphasize the importance of proactive planning to minimize the tax impact. Steps include:

• Determining the year in which forgiveness occurs.
• Estimating the taxable amount based on that year’s income.
• Setting aside funds to cover potential federal and state tax bills.
• Exploring IRS payment plans to manage liabilities over time.

“The biggest thing borrowers need to do is plan ahead,” said Landon Warmund, CFP. “You can get ahead of these tax liabilities if you start preparing now.”

With the IDR tracking tool on StudentAid.gov no longer available, borrowers will need to work closely with financial advisors or loan servicers to calculate eligibility dates and expected tax exposure.

Looking Ahead

As student loan forgiveness once again triggers taxable income, millions of Americans may face unexpected tax bills in 2026. Those with IDR plan balances should act now to understand their obligations, preserve eligibility records, and set aside funds to mitigate the impact, ensuring they are not caught off guard by the return of the federal tax “bomb.”