- President Donald Trump’s “big beautiful bill” changes the taxation policy on certain kinds of student loan forgiveness.
- Borrowers who benefit from debt cancellation under income-driven repayment plans, or IDRs, could be hit with a hefty tax bill, starting in 2026.
- One expert estimated the tax burden for such debt relief could range from $7,000 to $12,000.
For those who receive student debt forgiveness, President Donald Trump’s “big beautiful bill,” which Congress enacted earlier this month, has tax ramifications.
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Through the end of 2025, student loan forgiveness is tax-free at the federal level thanks to the American Rescue Plan Act of 2021. That broader provision was not extended or made permanent by Trump’s “big beautiful bill,” even if it made other specific types of student loan relief tax-free.
Theoretically, before the year ends, politicians could take action to preserve the tax break, but experts advise borrowers not to rely on it.
According to higher education expert Mark Kantrowitz, “Republicans do not like [student loan] forgiveness, and are unlikely to make it tax-free.”
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Borrowers of student loans who have their debt forgiven under the U.S. Department of Education’s income-driven repayment plans, or IDRs, would be hit with another federal tax charge beginning in 2026 if Congress did nothing. (IDR programs eliminate any outstanding debt after a predetermined amount of time, usually 20 or 25 years, and cap monthly payments at a percentage of the borrower’s discretionary income.)
According to Kantrowitz, the IRS normally classifies forgiven debt as income, so the tax bill at the end of repayment could be substantial.
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According to Kantrowitz, the typical loan balance for borrowers participating in an IDR plan is approximately $57,000. According to Kantrowitz, removing that amount would result in a tax burden of more than $12,000 for people in the 22% tax bracket. Those in the 12% tax rate or those with lower incomes would still owe almost $7,000.
After their student loans are forgiven, borrowers may also be responsible for state taxes. (Many states follow the federal government’s student loan tax policy, so analysts predict that more states will begin to impose the aid next year.)
The practice of charging borrowers on their student debt forgiveness has long been condemned by consumer activists. According to them, borrowers who sign up for IDR programs frequently find it difficult to pay their bills on time, and the government’s approach frequently erases student loan debt only to leave the borrower with tax debt.
“It is cruel to force borrowers to continue drowning in debt,” stated Persis Yu, managing counsel and deputy executive director of the Student Borrower Protection Center.
According to Kantrowitz, the “big beautiful bill” did permanently make student loan forgiveness tax-free in the event of death or disability.
Because of the legislation, he added, employees who receive assistance from their employer in paying off their debt will also not be required to pay taxes on that relief in the future. Firms are currently permitted to make an annual tax-free contribution of $5,250, but this amount will rise in line with inflation.
Under the parameters of the program, public service loan forgiveness has always been and will remain tax-free at the federal level. Your state might impose taxes on the assistance. After ten years of payments, the government and some non-profit employees can have their debt forgiven under that program.
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