Federal student loan borrowers can have their remaining debts forgiven after making payments for 20 or 25 years on income-driven repayment plans.
But as of Jan. 1, 2026, that debt forgiveness could come with a massive tax liability that would undercut much of the benefit the forgiveness offers for millions of borrowers, advocates warn.
Student debt forgiveness has been exempt from federal income tax since the passage of the American Rescue Plan in 2021. That provision expires at the end of 2025 though, so without a regulatory change, borrowers who receive loan forgiveness through IDR programs will owe federal income tax on amounts forgiven on Jan. 1 and after.
A borrower with around $49,321, the average amount of debt forgiven, could see a net loss of $5,800 to over $10,000 in owed taxes and lost credits, according to an analysis by Protect Borrowers, a nonprofit advocacy organization. Those amounts could be even higher if larger debt burdens are forgiven.
On Nov. 9, nine Democratic senators, including Sen. Elizabeth Warren (D-Mass.) and Sen. Bernie Sanders (I-Vt.), cited Protect Borrowers’ analysis in a letter to Treasury Secretary and acting Internal Revenue Service commissioner Scott Bessent urging the federal government to act now to prevent borrowers from getting hit with this coming “tax bomb” by permanently excluding loan forgiveness earned through IDR from federal income taxes.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers,” the senators wrote.
Who would be impacted most
Anyone who receives loan forgiveness through IDR after Jan. 1, 2026 will have their forgiven amount treated as taxable income, subject to federal income taxes.
That tax liability would disproportionately hurt low-income borrowers, Protect Borrowers said in its analysis. That’s because those borrowers typically don’t have the means to cover an unexpectedly large tax bill if their taxable income significantly increases.
About 62% of borrowers who earn loan forgiveness through IDR earn $50,000 a year or less and two-thirds of those borrowers have less than $1,000 in savings, Protect Borrowers wrote, citing Consumer Financial Protection Bureau data.
A sizeable increase in taxable income could also affect borrowers’ eligibility for tax credits, such as the earned income tax credit, which phases out after certain income thresholds.
Borrowers who don’t have the assets necessary to cover their tax liability can exclude the forgiven debt from their income under the IRS’ insolvency exclusion. But Warren and her fellow senators argue leaving that up to borrowers to figure out and the IRS to determine on a case-by-case basis would be an inadequate solution.
Filing the insolvency exclusion is a “notoriously complex process for taxpayers,” and approving each individual insolvency case for borrowers would be an “administrative nightmare” for the IRS, the senators wrote.
The letter requests that the IRS and Treasury Department confirm their intent to make the regulatory change by Nov. 23, 2025. Secretary Bessent did not immediately respond to CNBC Make It’s request for comment.
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