Student Loan Forgiveness Could Raise Federal Tax Bills in 2026

Millions of Americans pursuing federal student loan forgiveness could face substantially higher tax bills after a temporary federal tax exemption expired at the end of 2025. A study by nonprofit advocacy group Protect Borrowers warns that the change, effective in 2026, could increase federal income taxes for as many as 3 million middle- and working-class families over the next decade.

Congress exempted canceled federal student debt from federal income taxation in 2021, including balances discharged through income-driven repayment (IDR) plans. With that provision expired, forgiven balances can again count as taxable income, potentially increasing tax liabilities and reducing eligibility for certain tax credits.

Nearly 13 million Americans, representing almost half of federal student loan borrowers in repayment, are enrolled in IDR plans and making progress toward potential forgiveness, according to Protect Borrowers. The organization estimates that affected borrowers could owe approximately $6,000 to nearly $12,000 in additional taxes, depending on income, filing status and family size.

Jennifer Zhang, policy, research, and data analyst at Protect Borrowers and author of the report, warned that the change could create significant financial pressure for borrowers who have spent decades repaying their loans.

"This tax bomb will force millions of working-class families, who have been diligently making payments for two decades or more, to trade their student loan debt for debt to the IRS,” said Jennifer Zhang, policy, research, and data analyst at Protect Borrowers.

The study illustrates how the tax consequences could affect households at different income levels. A single borrower earning $40,000 could face more than $10,000 in federal taxes, while someone earning $60,000 could owe more than $15,000. For a single borrower earning $80,000, federal taxes could approach $20,000.

Protect Borrowers also estimates that additional taxable income could reduce or eliminate credits such as the earned income tax credit and the child tax credit. A married borrower earning $60,000 annually and supporting a household of four could face $7,206 in lost credits and additional taxes after forgiveness, compared with a tax credit of $3,102 under the report's baseline scenario.

For a family of four earning $40,000 annually, the study estimates that canceled student debt could result in $10,558 in lost credits and additional taxes. The family's tax liability could rise to more than 11 times its usual level.

Despite the potential tax burden, education finance experts say forgiveness can remain financially advantageous because the resulting tax bill is often smaller than the amount of debt eliminated.

"For most borrowers pursuing IDR forgiveness, a taxable forgiveness event is still financially advantageous," said Stacey MacPhetres, senior director of education finance at Bright Horizons, a provider of educational advisory services.

MacPhetres compared paying off a remaining $30,000 student loan balance with receiving forgiveness on the same amount. Under an example assuming a tax bill of $5,000 to $7,000, forgiveness would leave the borrower with a substantially lower direct cost than repaying the entire balance.

"The borrower comes out far ahead even after paying taxes," she said.

MacPhetres identified the timing of the tax payment as a key challenge for borrowers. Those receiving forgiveness in 2026 generally would report the taxable income on their 2026 federal tax returns, filed in April 2027, and should estimate their potential liability in advance.

Borrowers who cannot pay the full amount may qualify for IRS payment plans, although interest, penalties and certain setup fees can add to the balance.

Certified public accountant Richard Pon of San Francisco said IRS debt can sometimes become more costly than student loan debt because interest is added daily and can compound. He also identified wage garnishment, asset seizures and interest rates higher than those on federal undergraduate loans as potential concerns.

Some student loan forgiveness remains tax-free, Pon said, including qualifying cases involving insolvency or bankruptcy, Public Service Loan Forgiveness, the National Health Service Corps loan repayment program and certain state loan repayment programs serving areas with shortages of medical professionals.