Student loan forgiveness is taxable. How to plan for the IRS bill

Many student loan borrowers who get their debt forgiven in 2026 can expect a hefty tax bill next year. That’s because a law that shielded the relief from taxation at the federal level — part of the American Rescue Plan Act of 2021 — expired in December.

Most impacted borrowers will be those who have their debt excused under the U.S. Department of Education’s income-driven repayment plans, or IDRs. Enacted in the 90s, IDR plans cap people’s monthly payments at a share of their discretionary income — and erase any remaining debt after a certain period, typically 20 or 25 years.

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

Because that forgiven federal student debt may now be considered income by the IRS, the tax liability can be substantial.

The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said Kantrowitz. For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of more than $12,000, Kantrowitz estimated. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.

As a result, those who expect student loan forgiveness this year should start planning for the bill now, experts say. Here’s what you can do.

The new potential tax liability comes at the same time that many student loan borrowers have faced delays in accessing the debt forgiveness to which they’re entitled. But in a recent settlement between the American Federation of Teachers and the Trump administration, Education Department officials clarified that borrowers who became eligible for student loan forgiveness in 2025 won’t owe federal taxes on the relief — even if their debt isn’t officially discharged until later.

That means if you received confirmation in 2025 that you’re eligible for debt cancellation, you should save that dated record, said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York. You may be able to use that document to prove you were entitled to the relief before the tax-free provision lapsed, Nierman said.

For some student loan borrowers, “big balances are going to be forgiven,” said certified financial planner and certified student loan professional Landon Warmund at Reliant Financial Services in Kansas City, Missouri.

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

Because those forgiven balances could count as regular income starting this year, borrowers may face other tax consequences, as well, he said. For example, forgiveness could thrust you into a higher tax bracket, said Warmund, who is also a member of CNBC’s Financial Advisor Council.

Plus, many tax breaks, including the student loan interest deduction, get smaller or disappear once income exceeds certain thresholds.  

You can work with a financial advisor or tax professional, who will keep all these factors in mind, to estimate your future tax bill, said Ethan Miller, a CFP and founder of Planning for Progress in the Washington, D.C., area. Miller specializes in student loans.

You’ll also want to assess whether you owe any taxes to your state, as some have their own tax policies regarding the relief.

“Hopefully, you can take the amount you were paying on your loans, start putting that aside and building up a pot of money,” Miller said. 

But even with advanced planning, some lower earners could struggle to save enough before next year’s tax bill, he added.

Typically, taxes are due by the filing deadline — which will be April 15 in 2027 — but some borrowers may qualify for an IRS payment plan, Miller said.

If your total tax liability is $50,000 or less, including your balance, penalties and interest, and you’re current on tax returns, you can apply for a short-term (180 days or less) or monthly payment plan via your IRS online account, according to the agency.

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

Finally, other borrowers in a difficult financial situation may be able to apply for an Offer in Compromise, which may result in the IRS allowing you to pay a smaller amount than you owe.