by Washington, D.C. — Millions of student loan borrowers across the United States may soon face unexpected federal tax bills of up to $10,000 beginning in 2026, as key tax exemptions for forgiven student debt are set to expire.
Federal Tax Break on Student Debt Forgiveness to End
Since the passage of the American Rescue Plan Act of 2021, borrowers who received student loan forgiveness were exempt from paying federal income tax on canceled debt. That relief, however, expires on December 31, 2025, unless Congress intervenes.
Starting January 1, 2026, any student loan forgiveness under income-driven repayment (IDR) plans will once again be considered taxable income by the IRS, potentially creating crushing financial burdens for borrowers who have spent decades repaying their loans.
Lawmakers Raise Alarm Over “Tax Bomb”
A coalition of nine U.S. senators, including Elizabeth Warren (D-MA) and Bernie Sanders (I-VT), has issued a warning to Treasury Secretary Scott Bessent and the IRS, urging immediate action to prevent what they call a looming “tax bomb.”
In a November 2025 letter, the senators wrote that imposing federal income taxes on forgiven debt would “punish borrowers who have upheld their end of the deal” and undermine the purpose of federal repayment programs designed to offer financial relief.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers,” Sen. Warren said.
Borrowers Could Owe Thousands
According to Protect Borrowers, a nonprofit advocacy group, a typical borrower with $49,000 in forgiven debt could owe $5,800 to $10,000 in federal taxes.
Financial expert Michael Ryan, founder of MichaelRyanMoney.com, warned that someone receiving $50,000 in forgiveness could owe as much as $11,000 to the IRS.
“Turning long-promised relief into grief instead of relief — that’s the real problem,” Ryan told Newsweek.
Policy Changes Add to Confusion
Further complicating matters, the Department of Education (DOE) will roll out a new Repayment Assistance Plan (RAP) in July 2026 under the One Big Beautiful Bill Act signed by former President Donald Trump.
The RAP requires higher monthly payments, does not adjust for inflation, and imposes minimum payments even for borrowers with no income.
Those taking new federal loans after July 1, 2026, must enroll in RAP or the Standard Plan, while existing IDR participants can remain but may face delays in debt forgiveness due to ongoing court injunctions.
Congress Faces Pressure to Act
Advocates and lawmakers are pressing Congress to extend or make permanent the tax exemption. Without legislative action, any debt forgiven after January 1, 2026, will be treated as taxable income, potentially triggering an avalanche of tax bills across the nation.
“Who signs up for a 20-year payment plan knowing there’s a tax grenade at the finish line?” Ryan added. “Without action, this defeats the entire purpose of income-based repayment.”
Millions at Risk
Roughly 3 million borrowers are currently enrolled in IDR programs, but experts warn that millions more could soon be pushed into RAP or other less favorable repayment plans.
As forgiveness timelines are extended, the expiration of the tax exemption could cause widespread financial hardship, particularly for low- and middle-income borrowers with limited savings.
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