Federal student loan borrowers can have their remaining debt forgiven after making payments for 20 or 25 years under an income-driven repayment plan.
But as of Jan. 1, 2026, advocates warn that debt forgiveness could come with a huge tax liability, potentially eroding many of the benefits the forgiveness would bring to millions of borrowers.
Since the passage of the American Rescue Plan in 2021, student debt forgiveness has been exempt from federal income taxes. However, this provision expires at the end of 2025, meaning that absent regulatory changes, borrowers who receive loan forgiveness through the IDR program will be liable to pay federal income taxes on amounts forgiven after January 1.
An analysis by the nonprofit advocacy group Protect Borrowers found that the average borrower with approximately $49,321 in debt forgiveness could expect a net loss of between $5,800 and more than $10,000 due to unpaid taxes and forfeited credits. That amount could rise even higher if a larger debt burden is forgiven.
On November 9, nine Democratic senators, including Sen. Elizabeth Warren (D-Mass.) and Sen. Bernie Sanders (D-Vt.), announced that Treasury Secretary and Acting Commissioner of the Internal Revenue Service Scott Bessent In the letter, they cited Protect Borrowers’ analysis and called on the federal government to act now to protect borrowers from future “tax bombs” by permanently excluding loan forgiveness obtained through IDRs from federal income taxes.
“By penalizing IDR recipients with huge taxes, the federal government undermines the very purpose of the IDR program and violates its promise to borrowers,” the senators wrote.
Who is most affected?
For those who receive loan forgiveness through IDR on or after January 1, 2026, the amount forgiven will be treated as taxable income and will be subject to federal income tax.
Protect Borrowers said in its analysis that the tax liability would disproportionately hit low-income borrowers. Such borrowers typically don’t have the wherewithal to cover unexpectedly high taxes if their taxable income increases significantly.
Citing data from the Consumer Financial Protection Bureau, Protect Borrowers wrote that about 62% of borrowers who get loan forgiveness through IDR have annual incomes of less than $50,000, and two-thirds of those borrowers have less than $1,000 in savings.
A significant increase in taxable income may also affect a borrower’s eligibility for tax credits, such as the Earned Income Tax Credit, which is phased out after a certain income threshold.
Borrowers who do not have the necessary assets to cover their tax obligations can exclude the forgiven debt from their income under the IRS bankruptcy exclusion. But Warren and her fellow senators argue that leaving that up to the borrower and the IRS to decide on a case-by-case basis is an inappropriate solution.
Filing for bankruptcy exclusion is a “notoriously complex process for taxpayers,” the senators wrote, and approving each borrower’s individual bankruptcy case would be an “administrative nightmare” for the IRS.
The letter asks the IRS and Treasury Department to confirm their intention to make the regulatory changes by November 23, 2025, but Bessent did not immediately respond to CNBC Make It’s request for comment.
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