Millions of student loan borrowers who will eventually have their remaining debt forgiven could face thousands of dollars in additional federal taxes, according to a new report. The report from Protect Borrowers, a nonprofit organization that advocates for student debt relief, estimated that between 2 million and 3 million Americans could face a student loan "tax bomb" over the next decade as borrowers reach forgiveness under income-driven repayment (IDR) plans. For some households, receiving that loan forgiveness could more than double or triple their federal tax burden, with the exact extra costs ranging from $6,000 to nearly $12,000, Protect Borrowers found.
The IRS still wants actual cash,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek. And we're talking about people who may already be in their 40s, 50s, or 60s. Those are years they can't easily get back.” These new tax bills come after a federal tax exemption for student loan forgiveness expired on December 31, 2025.
As a result, qualifying IDR debt canceled during the 2026 tax year can once again be treated as taxable income for federal purposes. Income-driven repayment plans are designed to tie borrowers' monthly student loan payments to their earnings and eventually cancel remaining balances after a set repayment period. Borrowers generally can earn cancellation after 20 to 25 years under qualifying IDR plans, while borrowers in the newer Repayment Assistance Plan established under the One Big Beautiful Bill Act can receive cancellation after 30 years of eligible payments.
But the potential tax consequences are significant because the amount forgiven can be large compared with a borrower's annual earnings. According to the new report, the average balance canceled through IDR is $49,697. Most borrowers who received IDR cancellation made less than $50,000 annually in 2022, equivalent to approximately $60,000 in 2026 after adjusting for inflation.
Nearly 13 million Americans are currently enrolled in IDR plans and making progress toward potential cancellation, although not all of them will receive taxable forgiveness. However, roughly 2 million to 3 million borrowers could become eligible for cancellation and subsequently encounter the federal tax consequences during the next decade. That law temporarily excluded qualifying canceled student loan debt, including debt canceled through IDR, from federal taxable income.
However, the exemption only lasted through December 31, 2025. That means beginning with the 2026 tax year, the forgiven balance for affected IDR borrowers may again count as taxable income. Families can get hit twice when the forgiven debt also reduces valuable tax credits,” Ryan said.
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