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Damircudic | E+ | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
The\u00a0American Rescue Plan<\/a>\u00a0Act of 2021 made\u00a0student loan forgiveness<\/a>\u00a0tax-free at the federal level through\u00a0the end of 2025<\/a>. Trump’s “big beautiful bill” did not extend or make permanent that broader provision.<\/p>\n Without action from Congress, student loan borrowers who get their debt forgiven under the U.S. Department of Education’s income-driven repayment plans, or IDRs, would face a federal tax bill again starting in 2026. IDR plans cap people’s monthly payments at a share of their discretionary income and cancel any remaining debt after a certain period, typically 20 years or 25 years.<\/p>\n More from Personal Finance:<\/strong> The recent delays to loan forgiveness are a result of multiple changes. Among them: <\/p>\n Unless the U.S. Department of Education “acts quickly” to forgive the debt of eligible borrowers, they “could face significant tax bills on debt relief that should have been granted to them without penalty,” lawmakers, including Sen. Bernie Sanders, I-Vt., wrote in a letter<\/a> to Education Secretary Linda McMahon on Monday.<\/p>\n<\/div>\n The tax bill on student loan forgiveness can be significant.<\/p>\n The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said higher education expert Mark Kantrowitz.<\/p>\n For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of over $12,000, Kantrowitz estimates. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.<\/p>\n<\/div>\n Borrowers could also be on the hook for state taxes. Many states mirror the federal government’s tax policy on student loans, meaning more states may start to levy the aid next year as well, experts say.<\/p>\n Debt relief granted under the Public Service Loan Forgiveness program is not subject to federal taxes, although borrowers may owe their state a bill. As of July 31, there was a 72,730-person backlog<\/a> of borrowers waiting to have the Department of Education help them access their PSLF loan forgiveness.<\/p>\n<\/div>\n Borrowers who expect they’ll become eligible for student loan forgiveness in 2025 “should save all payment records with their servicers,” Nierman said.<\/p>\n “If necessary, they can use this information to prove they were entitled to forgiveness during a year in which it is not subject to tax,” she said.<\/p>\n For borrowers who anticipate the relief after Jan. 1, 2026, Nierman recommends starting to plan for the tax bill by salting away some money when you can in preparation.<\/p>\n<\/div>\n The headquarters of the Department of Education on March 12, 2025 in Washington, DC.<\/p>\n Win McNamee | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n Borrowers often don’t have to pay the entire tax bill in one sum, she added.<\/p>\n “They can request a plan through the IRS to spread the payments over a longer period of time,” Nierman said. Meanwhile, if your liabilities exceed your assets or you’re dealing with a serious financial hardship, you may be able to reduce or eliminate the bill altogether, she said.<\/p>\n<\/div>\n<\/div>\n\n
Trump floats tariff ‘rebate’ for consumers<\/a>
Student loan forgiveness may soon be taxed again<\/a>
Student loan borrowers \u2014 how will the end of the SAVE plan impact you? Tell us<\/a><\/p>\n\n
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Loan forgiveness tax liability could be significant<\/h2>\n
What to do about the possible tax bill<\/h2>\n
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