Student loan forgiveness is taxable again. Here is what that could cost borrowers

Borrowers who get their federal student loans forgiven through an income-driven repayment plan can once again owe federal income tax on the canceled amount, and a new report estimates the bills could reach thousands of dollars per household.

A temporary exemption in the American Rescue Plan Act of 2021 made canceled federal student debt tax-free. That exemption expired on Dec. 31, 2025, so income-driven repayment (IDR) forgiveness granted in 2026 can count as taxable income, according to Newsweek, Forbes and Bankrate.

## What the new report found

The estimates come from Protect Borrowers, a nonprofit that advocates for student debt relief, in an October 2026 report titled "Fleeced at the Finish Line."

The group estimates that 1.9 million to 3.2 million borrowers could receive IDR forgiveness between 2026 and 2036 and face a tax bill on it. It puts the national average IDR cancellation at $49,697, often more than the original loan because of years of accrued interest.

Using 2026 federal tax rules, the report modeled what that average amount would add to different households' federal taxes. Its estimates range from about $6,000 to nearly $12,000. Newsweek and Forbes both reported the findings.

## The math, using the report's numbers

Here is how the report's scenarios work out for a single borrower with no dependents who receives the average $49,697 in forgiveness:

- Earning $40,000: about $8,205 in added federal tax, for a total bill of $10,525
- Earning $60,000: about $10,583 in added federal tax, for a total bill of $15,303
- Earning $80,000: about $11,641 in added federal tax, for a total bill of $19,861

To put the $40,000 example in monthly terms: setting aside enough to cover $8,205 over 12 months would take about $684 a month.

The report assumes borrowers do not claim the insolvency exclusion, so Forbes noted the figures likely overstate many households' bills.

## Which forgiveness is still tax-free

Not every kind of student loan relief is affected. Public Service Loan Forgiveness and Teacher Loan Forgiveness remain federally tax-free, according to Newsweek and Bankrate. So do discharges for death or permanent disability, which the 2025 tax and spending law known as the One Big Beautiful Bill Act made permanently tax-free, Forbes reported. Closed-school and false-certification discharges are also excluded, according to Bankrate.

The forgiveness that is taxable is the kind granted after 20 to 30 years of payments under plans such as Income-Based Repayment and the new Repayment Assistance Plan, Forbes reported. The new plan requires 30 years of payments before cancellation, according to Newsweek.

State taxes are a separate question. Some states tax forgiveness even when the federal government does not, so borrowers should check their own state's rules, Bankrate reported.

## The debate

Protect Borrowers argues the tax hits lower-income borrowers hardest. Its report says most IDR recipients earn under about $60,000 a year in today's dollars and urges Congress to permanently exempt IDR forgiveness from federal tax.

The ARPA exemption was written as a temporary provision, according to Newsweek. The articles reviewed for this story did not include a response from the Education Department, the Treasury Department or the White House. Newsweek reported the tax consequences apply "unless Congress changes the law," and Forbes reported no current proposal to restore the exemption.

## What it means for you

If you are in college or recently graduated, this mostly affects your future self. IDR forgiveness typically comes after two decades or more of payments.

If you or someone in your family is close to IDR forgiveness, the canceled amount is reported on IRS Form 1099-C and treated as ordinary income in the year it is canceled, according to Forbes and Bankrate. Borrowers whose debts exceed their assets may be able to exclude some or all of it by filing IRS Form 982 under the insolvency rule, Bankrate reported. The IRS also offers payment plans.

Anyone working toward Public Service Loan Forgiveness is not affected by this change at the federal level.