Student loan forgiveness could bring federal tax bills of $6,000 to $12,000, report says

Centre · 2Protect Borrowers, a student-loan advocacy nonprofit, released a report saying borrowers whose remaining student debt is forgiven in 2026 could face substantially higher federal tax bills. 1 2 Centre · 2The report puts the additional cost of taxes and lost tax credits at roughly $6,000 to nearly $12,000 across the scenarios it studied. 1 2 Centre · 2The cause is the expiry on 31 December 2025 of a temporary exclusion, created under the 2021 American Rescue Plan, that kept forgiven student debt out of federal taxable income. 1 2

Centre · 2The affected borrowers are those whose balances are cancelled under income-driven repayment (IDR) plans, which forgive what remains after 20 or 25 years; Newsweek adds that the newer Repayment Assistance Plan, set up under the One Big Beautiful Bill Act, offers cancellation after 30 years. 1 2 Centre · 2As an example, the report estimates a married couple with two children earning $60,000 with about $50,000 forgiven would face about $7,200 in extra federal taxes and lost credits; Newsweek gives the figure as $7,206 and says it would take that household's tax burden to more than three times what it otherwise would have been. 1 2 Centre · 1Newsweek reports further modelled cases: a family of four earning $40,000 would face $10,558 in additional taxes and lost credits, and single borrowers earning $40,000 or $60,000 could pay more than $10,000 or more than $15,000 in federal taxes respectively. 2

Centre · 1According to Newsweek's account of the report, the average balance cancelled through IDR is $49,697, nearly 13 million Americans are enrolled in IDR plans, and 2 million to 3 million could face the tax over the next decade. 2 Centre · 1Hindustan Times, citing Business Insider, says borrowers in Southern states such as Louisiana, Mississippi and Arkansas are expected to see some of the biggest increases because they tend to have larger balances and lower incomes. 1 Centre · 1Public Service Loan Forgiveness and Teacher Loan Forgiveness remain federally tax-free, so the issue concerns time-based IDR forgiveness. 2

Centre · 1Protect Borrowers policy analyst Jennifer Zhang argued the tax undermines the promise of IDR relief, and a group of Democratic lawmakers has urged Congress and the Treasury Department to restore tax-free treatment, citing an earlier Protect Borrowers estimate of losses of roughly $5,800 to $10,000. 1 Centre · 2Finance commentators quoted by Newsweek warned the bills could drain savings, delay retirement contributions and expose borrowers to penalties, interest and IRS collection, while one borrower told Business Insider she is six payments from forgiveness and does not know how she would afford the tax. 2 1 Centre · 1Newsweek says that unless Congress changes the law, the size of any bill will depend on income, the amount cancelled, filing status, dependents and tax credits. 2