Dive Brief:
- Student loan borrowers whose debts are canceled through income-driven repayment plans in 2026 can expect their next federal tax bill to jump by roughly $6,000 to $12,000, according to an analysis from Protect Borrowers, a legal and advocacy nonprofit.
- That increase could double or triple IDR borrowers’ 2026 tax bill come April, the nonprofit’s report said. For example, a married borrower with two dependents would owe an average of $7,206 in additional taxes on canceled IDR debt, more than tripling their expected total.
- The added costs will depend on a borrower’s income and tax status, as well as the size of their family. Low- and middle-income borrowers can expect to see the sharpest tax increases, the report said. Most IDR borrowers earn less than $60,000 a year.
Dive Insight:
Under the pandemic-era American Rescue Plan Act, discharged student loan debt did not count as income on federal taxes from Dec. 31, 2020, to Dec. 31, 2025. But since Congress allowed that provision to expire, IDR loans discharged in 2026 and beyond will appear on borrowers’ tax bills.
Protect Borrowers called on federal lawmakers to intervene and permanently exempt discharged IDR loans, as well as discharged loans through the Repayment Assistance Plan, from federal taxes in the next budget reconciliation process.
The average discharged IDR loan is worth about $50,000, according to the nonproft. Its analysis said that sum often outstrips the value of the initial loan, due to borrowers’ low income-based monthly payments not covering the cost of ballooning interest.
Single borrowers without children with discharged IDR loans would pay over $10,000 in federal taxes if they earned $40,000 in 2026 and nearly $20,000 if they earned $80,000.
After payroll and state taxes, these borrowers “could effectively see their take-home income cut nearly in half,” the report said.
Families with children and a lower household income could see the highest share of their annual earnings absorbed by the tax increase. A household of four with $40,000 in annual income can expect to pay an additional $10,558 on top of their base expected tax bill — $1,704 in new taxes and $8,854 in lost tax credits.
“Treating such cancelled debt as taxable income will hit many borrowers with an unprecedented tax bomb and force them to replace their debt to the U.S. Department of Education with debt to the Internal Revenue Service,” the analysis said.
The change is also expected to have a disproportionate impact on borrowers in the South, as they typically have larger loan balances and lower incomes than the U.S. average.
The massive expected increase in taxes will put most borrowers in an impossible financial position, after they’ve already “endured significant financial hardship for a majority of their adult lives,” Protect Borrowers said.
As of 2022, half of borrowers who had their IDR student debt canceled didn’t have a bank account or nonretirement savings, the nonprofit said, citing survey data from the Consumer Financial Protection Bureau.
Like Protect Borrowers, a coalition of Democratic Senators last November called on the Trump administration to exempt canceled IDR loans from income taxation.
Following Tuesday’s midterms, Democrats are set to gain control of both chambers of Congress and such a change could stand a better chance of passing. President Donald Trump still holds veto power.
