Student loan forgiveness may soon be taxed again — here's how much borrowers could owe

CNBC

2 days ago

President Donald Trump's "big beautiful bill," which Congress passed earlier this month, has tax implications for people who receive student loan forgiveness.
Here's what borrowers expecting the loan relief should know.
The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. Trump's "big beautiful bill," while making other specific kinds of student loan relief tax-free, did not extend or make permanent that broader provision.
In theory, lawmakers could move to protect the relief from taxes before the end of the year, but borrowers shouldn't count on it, experts say.
"Republicans do not like [student loan] forgiveness, and are unlikely to make it tax-free," said higher education expert Mark Kantrowitz.
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.)
That tax bill at the end of repayment could be significant — the IRS typically counts forgiven debt as income, Kantrowitz said.
More from Personal Finance:Trump's 'big beautiful bill' slashes CFPB funding78% say Trump's tariffs will make it harder to deal with debtTax changes under Trump's 'big beautiful bill' — in one chart
The average loan balance for borrowers enrolled in an IDR plan is around $57,000, Kantrowitz said. For those in the 22% tax bracket, having that amount wiped out 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.
Borrowers could also be on the hook for state taxes following their student loan forgiveness. (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.)
Consumer advocates have long criticized the practice of taxing borrowers on their student loan forgiveness. They say that borrowers who enroll in IDR plans tend to struggle to keep up with their bills, and that the government's policy often wipes away one's student debt just to saddle them with a tax debt.
"Forcing borrowers to remain drowning in debt is cruel," said Persis Yu, deputy executive director and managing counsel at the Student Borrower Protection Center.
The "big beautiful bill" did permanently make it so that student loan forgiveness in cases of death or disability are tax-free, Kantrowitz said.
Employees who receive help from their company paying down their debt also won't owe any taxes in the future on that relief, due to the legislation, he added. The current allowable annual tax-free contribution from firms is $5,250, but that amount will increase with inflation.
Public Service Loan Forgiveness has always been, and will continue to be, tax-free on the federal level, under its terms. (It's possible your state will tax you on the aid). That program allows government and certain non-profit workers to get their debt excused after a decade of payments.