Student Loan Forgiveness Now Taxable in 2026, Affecting Up to 3.2 Million Borrowers

Income-driven repayment student loan forgiveness is taxable for the 2026 tax year, a change that could result in unexpected tax bills for up to 3.2 million borrowers who have had or expect to have loans forgiven under federal programs.

During the COVID-19 pandemic, Congress temporarily made student loan forgiveness tax-free at the federal level through 2025. That provision has now expired, meaning borrowers whose loans are forgiven in 2026 will owe federal income tax on the forgiven amount as if it were ordinary income.

For a borrower who has $50,000 in loans forgiven, the tax bill could range from $5,500 to $18,500 depending on their tax bracket. Some states also tax forgiven student loan debt, adding to the potential liability.

The change affects borrowers on income-driven repayment plans who reach the end of their repayment period, typically 20 or 25 years, and have remaining balances forgiven. It does not affect Public Service Loan Forgiveness, which remains tax-free under a separate provision of the tax code.

Financial advisors are urging affected borrowers to set aside money now to cover the tax bill, or to explore whether they qualify for insolvency relief, which can reduce or eliminate the tax owed if a borrower's debts exceed their assets at the time of forgiveness.

The Department of Education has not announced any plans to seek a new tax exemption for income-driven repayment forgiveness. Borrowers with questions about their specific situation are encouraged to consult a tax professional.