Some student loan forgiveness debt is now taxable. Here's what to know.
Some federal student loan borrowers could face tax bills this year for discharged debt. Credit: AP/Carlos Osorio
Starting this year, borrowers who get their federal student loans forgiven could face big tax bills.
The new rule will apply to those in income-driven repayment plans, which limit monthly payments to a portion of borrowers’ income and typically result in loan forgiveness after 20 or 25 years. Borrowers in those plans had been protected in recent years from federal tax bills under the American Rescue Plan Act of 2021. That law expired at the end of 2025, and the tax protections were not extended in President Donald Trump’s One Big Beautiful Bill Act.
Those affected by the change “are obviously, and rightfully so, really worried about this,” said Carolina Rodriguez, director of the Education Debt Consumer Assistance Program at the Community Service Society of New York. “It's never too early to talk to an accountant to understand what that potential tax liability looks like and then, if possible, start saving money to pay that tax liability and understand their options.”
How could borrowers be impacted by this tax change?
For borrowers in income-driven repayment plans who qualify for loan forgiveness in 2026 or later, the discharged debt will be treated as income and borrowers will need to pay taxes on it, loan experts said.
Borrowers in such plans owe about $58,000 on average, said Mark Kantrowitz, an expert on student financial aid. For that amount of forgiven debt, a borrower in the 12% federal tax bracket would owe roughly $7,000 in taxes, and those in the 22% tax bracket would need to pay about $12,700, he said.
State officials said the debt would not be subject to state taxes.
Who is not affected?
Loans discharged through public-service loan forgiveness programs, or for reasons such as death or disability, remain tax-free under federal law, said Winston Berkman-Breen, legal director at the nonprofit group Protect Borrowers.
In addition, he said, those who became eligible for forgiveness by 2025 but whose paperwork has been delayed due to backlogs at the federal Department of Education will not owe taxes on the forgiven debt. That’s due to an agreement reached in a lawsuit filed by the American Federation of Teachers against the federal agency, he said.
What should you do if you get a tax bill for forgiven debt?
If you receive a tax bill for recently discharged student loan debt, Berkman-Breen said, “Don't take for granted that you actually have tax liability. Go into your records and try to figure out when did you hit that threshold,”
Borrowers should also ask a tax professional whether they might be able to reduce their tax bill due to insolvency, or work out a payment plan, Berkman-Breen said.
Nicholas Prewett, executive director of financial aid and scholarship services at Stony Brook University, argued that getting student loans forgiven is “a big win” for borrowers even if they need to pay taxes on the debt. Forgiveness not only relieves them of monthly payments but can also improve their credit score, making it easier to borrow for a home or car, he said.
Students at Stony Brook graduate with an average loan balance of $20,000, he said. A recent report by the Federal Reserve Bank of New York shows that college graduates with a bachelor’s degree earn a median of $32,000 more a year than workers with high school diplomas.
“There's an apprehension to taking out student loan debt,” Prewett said. But, he said, “Even if you're borrowing for it, the returns that you're going to have with maybe a different type of career, different type of work or different income levels, are going to be a benefit.”
Maura McDermott covers education. Since joining Newsday in 2012, she also has worked on the investigations team and covered real estate and the business of health care.
