Student loan forgiveness is taxable. How to plan your IRS bill

More than 12 million student loan borrowers are enrolled in IDR plans, according to higher education expert Mark Kantrowitz.

Forgiven federal student loans can be considered income by the IRS, which could result in a large tax liability.

The average loan balance for borrowers enrolled in IDR plans is about $57,000, Kantrowitz said. Kantrowitz estimates that for those in the 22% tax bracket, that exemption would result in a tax liability of more than $12,000. Low-income earners, those in the 12% tax bracket, would still owe about $7,000.

As a result, experts say anyone expecting student loan forgiveness this year should start planning for their bill now. Here’s what you can do:

The new potential tax liability comes at a time when many student loan borrowers are facing delays in the debt forgiveness they would otherwise receive. However, in a recent settlement between the American Federation of Teachers and the Trump administration, Education Department officials made it clear that borrowers who qualify for student loan forgiveness in 2025 will not owe federal taxes on the relief, even if their debts are officially forgiven later.

That means if you receive confirmation that you’re eligible for debt forgiveness in 2025, you should keep a record of that date, says Nancy Nierman, assistant director of New York’s Education Debt Consumer Assistance Program. Nearman said the documents could be used to prove that they were eligible for relief before the tax exemption expired.

Landon Warmund, a certified financial planner and certified student loan specialist with Reliance Financial Services in Kansas City, Missouri, said that for some student loan borrowers, “large balances may be forgivable.”

In a recent court filing, the Trump administration said it identified more than 40,000 borrowers eligible for federal student loan forgiveness in January.

Borrowers could also face other tax consequences, he said, as these forgivable balances could be counted as regular income starting this year. For example, Warmund, who is also a member of CNBC’s Financial Advisory Council, said forgiveness could result in higher taxes.

Additionally, many tax breaks, including the student loan interest deduction, shrink or disappear once your income exceeds a certain threshold.

Ethan Miller, CFP and founder of Planning for Progress in the Washington area, said working with a financial advisor or tax professional who keeps all of these factors in mind can help you estimate your future tax liability. Miller specializes in student loans.

You should also check to see if you pay any taxes to your state, as each state may have its own tax rules for relief.

“Hopefully, you can collect what you were paying on the loan and put that aside and start saving money,” Miller said.

But even with sophisticated planning, some low-income earners may have trouble saving enough before next year’s tax hike, he added.

Typically, taxes must be paid by the filing deadline (April 15, 2027), but some borrowers may be eligible for an IRS payment plan, Miller said.

If your total tax liability, including balances, penalties and interest, is $50,000 or less and you currently file a tax return, you can apply for a short-term (180 days or less) or monthly payment plan through your IRS online account, the agency said.

However, fees may apply depending on the length of your payment plan. Additionally, penalties and interest may accrue until the balance is paid in full.

Finally, other borrowers in financial hardship may be able to apply for an offer in compromise, which may result in the IRS allowing them to pay less than they are owed.