10
Loading video...
By Suzanne Blake
Reporter
0
Share
Newsweek is a Trust Project member
See more of our trusted coverage when you search.Prefer Newsweek on Googleto see more of our trusted coverage when you search.
Some student loan borrowers who have their remaining balances forgiven this year could face thousands of dollars in additional federal taxes. And certain borrowers will be paying nearly $12,000 more, according to a new report from Protect Borrowers.
The nonprofit estimates that borrowers receiving forgiveness through income-driven repayment, or IDR, could incur roughly $6,000 to nearly $12,000 in additional federal taxes and lost tax credits, depending on their income and family size.
A temporary federal exemption that prevented many forms of canceled student loan debt from being treated as taxable income applied to discharges after December 31, 2020, and before January 1, 2026. However, it was not extended for IDR forgiveness beyond 2025.
Read More on Education
“Depending on the amount forgiven and the borrower's income, their tax amount could significantly increase, as any amount covered from income-driven repayment plans would be taxable,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
“The result could be a tax bill double or triple the usual one an individual would face and would create an extra burden at a time when many Americans are feeling the sting of inflationary pressures all around them.”
Why It Matters
Income-driven repayment plans are designed to make federal student loan payments more manageable by basing monthly bills partly on borrowers' incomes and family sizes. Depending on the plan, borrowers may have their remaining balance forgiven after making qualifying payments for 20 or 25 years.
The problem for borrowers now reaching the end of that journey is that a $50,000 student loan balance disappearing does not necessarily mean the federal government treats the transaction as having no financial value.
Generally, the IRS considers canceled or forgiven debt taxable unless an exclusion or exception applies. And if the canceled debt is taxable, it generally must be reported as income for the year in which the cancellation occurred.
For five years, student loan borrowers benefited from this unusually broad exception, but now the financial consequences may be coming back to haunt them.
...
What To Know
Protect Borrowers estimates 2 million to 3 million borrowers could become eligible for IDR cancellation and potentially be exposed to the resulting federal "tax bomb" over the coming decade.
“This has been a growing concern since a provision with excluded student loan forgiveness from any type of tax expired, leading the way for future debt elimination amounts to become taxable income,” Beene said.
Nearly 13 million Americans are currently enrolled in IDR plans and accumulating progress toward possible cancellation, according to the report.
How Much More Could Student Loan Borrowers Pay?
Not every borrower receiving student loan forgiveness will suddenly owe $12,000 to the government.
Protect Borrowers modeled different scenarios using a national average canceled IDR balance of $49,697 and borrowers earning $40,000, $60,000 or $80,000. It then calculated the effects for single borrowers without children, single parents with two dependents and married couples with two dependents.
However, for a single borrower earning $60,000, the report estimates a federal tax bill of $15,303 after the modeled loan cancellation, compared with $4,720 if the canceled debt were not taxed. That amounts to an additional $10,583 in taxes.
Meanwhile, at $80,000 of income, the report estimates additional costs ranging from $5,964 for a married borrower with two dependents to $11,641 for a single borrower without dependents.
“Not all loans are equal. IDR forgiveness is generally taxable beginning in 2026, meaning the amount of the loan forgiven could push up your taxable income and leave you with a tax bill many likely cannot afford to pay,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
“This is another bill coming due for some borrowers, potentially requiring additional interest and penalties, almost like a never-ending story for some.”
Lower-income families could be hit especially hard because adding forgiven debt to taxable income can affect their tax credits.
Why Did Student Loan Forgiveness Become Taxable Again?
Congress originally included Section 9675 in the American Rescue Plan Act in 2021. It generally excluded qualifying student loan discharges from federal taxable income for discharges occurring after December 31, 2020, and before January 1, 2026.
Congress subsequently made the tax exemption for student loans canceled because of death or total and permanent disability permanent but did not similarly extend the broad exemption for IDR cancellation beyond 2025, according to Protect Borrowers.
Public Service Loan Forgiveness is treated differently. Student loans discharged through PSLF are still excluded from federal taxable income.
Which Borrowers Could Be Hit Hardest?
The financial impact could also vary significantly by state and household.
Protect Borrowers found that borrowers in the South could experience some of the biggest increases because borrowers in a number of Southern states tend to have a combination of relatively larger IDR balances and lower incomes.
For married borrowers with two dependents using each state's median income and average IDR cancellation, the study found some of the largest increases in:
- Louisiana: $7,668 in additional taxes and lost credits.
- Mississippi: $7,303.
- Arkansas: $6,830.
- West Virginia: $5,883.
- Oklahoma: $5,885.
- New Mexico: $5,932.
Still, the largest numbers of potentially affected borrowers over the next decade are in Texas, with up to 275,000; California, up to 271,000; Florida, up to 221,000; New York, up to 172,000; and Ohio, up to 135,000.
“The reality is, many borrowers have been making payments for decades, and now that they are finally reaching the point of forgiveness, they could be met with another substantial bill. Imagine having $100,000 in student loans forgiven, only to find out that the IRS now considers that amount taxable income,” Thompson said.
“For many, this simply shifts the debt from one place to another. Instead of owing the Department of Education, you now owe the IRS.”
What Happens Next
Congress could eliminate the problem by once again excluding IDR forgiveness from federal taxable income, and Protect Borrowers has called on lawmakers to make forgiveness through both existing IDR programs and the newer Repayment Assistance Plan permanently exempt from federal income tax.
Democratic lawmakers were already pressuring the Trump administration over the issue before the midterms.
With Democrats now set to control both chambers of Congress, legislation addressing this tax treatment could have a clearer path through Capitol Hill, but President Donald Trump would retain the ability to veto legislation.
“With a new Congress soon to take power, this may be one of many policy revisions they look to make to ensure borrowers in the future won't have a tax shock,” Beene said.
Newsweek’s reporters and editors used Martyn, our AI assistant, to produce this story. Learn more about Martyn here.
Contact Newsweek editors on this story: Jason Lemon and Gray R. Thomas
View 0 Comments
Submit Correction
View Editorial & AI Guidelines