Student loan IDR forgiveness tax bomb warning 2026

Protect Borrowers, an advocacy group, warned this week that up to 3 million federal student loan borrowers could face tax bills of nearly $12,000 on debt forgiven under income-driven repayment plans, after Congress allowed a key tax exemption to expire.

The group released a report on Wednesday projecting that the tax consequences could affect anywhere from 2 to 3 million Americans across the coming decade, with the majority earning under $60,000 annually and holding virtually no savings, according to Forbes . The average amount discharged under IDR plans is $49,697, according to the report — a figure that frequently exceeds what borrowers first took out, because of accumulated interest.

"Treating cancelled student debt as income could double or even triple tax bills for working families who are overwhelmingly low-income and have already borne the financial burden of paying their student loans for over 20 years," Protect Borrowers said in the report.

The tax exposure stems from the expiration of relief Congress had previously put in place. Under the American Rescue Plan Act, which Congress enacted during the Biden administration, federal student loan discharges of every type — IDR plan completions included — were shielded from federal income tax. That exemption expired at the end of 2025. When the Republican-led Congress passed the One Big, Beautiful Bill Act, it chose not to preserve that relief for IDR discharges, so forgiveness completed from 2026 onward is once again a taxable event for borrowers.

For borrowers with larger balances, the tax consequences could be far steeper. At an estimated effective income tax rate of 20%, a borrower whose IDR plan discharges $200,000 in loans could owe the IRS $40,000 or more, according to Forbes.

Not all forgiveness programs are affected. Public Service Loan Forgiveness and Teacher Loan Forgiveness remain tax-free at the federal level. The One Big, Beautiful Bill Act did preserve one category of relief: it made the tax exemption for Total and Permanent Disability discharges permanent, the sole expiring student loan tax provision Congress chose to keep.

Some borrowers may be able to reduce their liability by claiming insolvency or through other existing tax mechanisms, but Protect Borrowers said those options will not help everyone.

Jennifer Zhang, a policy, research, and data analyst at Protect Borrowers and the author of the report, called on Congress to act. "Congress can and must take action to defuse the tax bomb and make cancellation a genuine reprieve for working families, not another financial nightmare," Zhang said in a statement, according to Forbes.