Student loan forgiveness is taxable again. How to plan for a five-figure IRS bill
#student loan forgiveness #taxable debt #income-driven repayment #American Rescue Plan #tax burden #financial planning #IDR plans #tax liability
📌 Key Takeaways
- Student loan forgiveness will become taxable again in 2026 due to expired legislation
- Borrowers with IDR plans could face tax bills of $7,000-$12,000 depending on their tax bracket
- Those who became eligible for forgiveness in 2025 may still be tax-free even if discharged later
- Certain forgiveness programs like Public Service Loan Forgiveness remain non-taxable
- Financial planning strategies include setting aside loan payments and consulting tax professionals
📖 Full Retelling
Student loan borrowers who get their debt forgiven in 2026 can expect a hefty tax bill in the United States as a provision from the American Rescue Plan Act of 2021 that shielded the relief from taxation expired in December. Most affected borrowers will be those whose debt is excused under the U.S. Department of Education's income-driven repayment plans, which cap monthly payments at a share of discretionary income and erase remaining debt after 20 or 25 years. With over 12 million borrowers enrolled in IDR plans and average loan balances around $57,000, those in the 22% tax bracket could face tax burdens exceeding $12,000, while those in the 12% bracket might owe approximately $7,000.
However, some borrowers who became eligible for forgiveness in 2025 won't owe federal taxes even if their debt isn't discharged until later, according to a settlement between the American Federation of Teachers and the Trump administration. Certain types of forgiveness, including Public Service Loan Forgiveness and Teacher Loan Forgiveness, remain non-taxable at the federal level. Financial experts recommend starting to plan now, potentially by setting aside the amount previously paid on loans to prepare for the tax bill.
Borrowers should also consult with advisors to estimate future tax liabilities and explore payment options if the full amount cannot be paid at once. Those who qualify may be able to establish an IRS payment plan if their total tax liability is $50,000 or less, and in difficult financial situations, some borrowers might apply for an Offer in Compromise to potentially pay a reduced amount to the IRS.
🏷️ Themes
Student Debt, Tax Policy, Financial Planning
📚 Related People & Topics
American Rescue Plan Act of 2021
Act to address economic effects of COVID-19
The American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package or American Rescue Plan, is a US$1.9 trillion economic stimulus bill passed by the 117th United States Congress and signed into law by President Joe Biden on March 11, 2021, to speed up the country's recovery from the ec...
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Original Source
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 from Financial Advisor Playbook: Here's a look at other stories affecting the financial advisor business. Bigger SALT cap may 'drive higher refunds,' tax expert says — who benefits Trump accounts could grow to $50,000 or more, president says. Advisors weigh in Housing affordability isn't just hurting buyers: More homeowners are falling behind In an affordability crunch, Gen Z adults lean on their parents for financial help Penalty-free withdrawals from 401 s can now pay for long-term care insurance Tax changes Social Security beneficiaries may see based on new laws 53% of investors with a required withdrawal for 2025 still haven't taken it: Fidelity The first step workers should take after a layoff, as job losses soar Politics is now the No. 1 money worry, financial planners say How to maximize Trump's bigger SALT deduction limit for 2025 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. A...
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