Student loan forgiveness may become taxable again: average loan amount, possible tax rate and bracket

Now that President Trump has signed his signature piece of legislation—dubbed the “big beautiful law”—the details of the package are coming to light. For current and future student loan holders, the new law introduces significant changes that should be kept in mind, especially as they could impact your taxes when filing next year.

Changes to student loans and tax filing

Though the Biden administration was unable to cancel the vast majority of student loan debt, targeted efforts were made to reduce balances for many borrowers. Additionally, under the American Rescue Plan passed by Democrats in Congress in 2021, forgiven loans were not taxed as income. In other words, borrowers weren’t required to report the forgiven debt as income on their taxes, which helped them avoid a higher tax burden.

However, these exemptions are set to expire, and borrowers whose loans are forgiven in 2026 may face larger tax bills. The provisions in the American Rescue Plan were only in effect through 2025, meaning next year’s tax season could bring new financial challenges for some.

Which borrowers might be impacted?

The end of the exemption could affect borrowers enrolled in income-driven repayment (IDR) plans, which require federal student loan holders to pay a portion of their income over a set period, typically 20 to 25 years. After that period, if the borrower has made the required payments, the remaining balance is forgiven. Starting in 2026, that forgiven balance could be considered taxable income, even though the borrower never actually receives that money. Without action from Congress, student loan borrowers who have their debt forgiven under the U.S. Department of Education’s IDR plans will once again face a federal tax bill starting in 2026.

How much could one’s tax bill increase?

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To get a sense of how this could affect the average borrower enrolled in an IDR plan, we turn to CNBC’s reporting. The financial outlet spoke with Mark Kantrowitz, a higher education finance expert, who broke down the numbers. “The average loan balance for borrowers enrolled in an IDR plan is around $57,000,” Kantrowitz told CNBC. For those earning between $47,151 and $100,525—an income that is taxed at a 22% rate—that forgiven balance could result in a tax bill of over $12,000, according to Kantrowitz‘s calculations. Even lower earners, taxed at a top rate of 12%, could see their tax bill rise by as much as $7,000.

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