The GOP’s Student Loan Forgiveness Trap: Leaving with a Surprise Tax Bill

For millions of Americans, student loan forgiveness under income-driven repayment (IDR) is the light at the end of a long tunnel—a promise that after decades of payments, any remaining debt will finally be wiped away. But under the Republican reconciliation bill that President Trump just signed into law, that promise comes with a catch: a surprise tax bill that could hit borrowers hard. That is, unless Congress acts.

Under IDR, borrowers make payments for 20 or 25 years, depending on the plan and whether they borrowed for graduate school. Payments are based on income and family size, and for many—especially those with low incomes relative to the size of their debt—IDR payments can be lower than payments on fixed payment plans. At the end of that term, any remaining balance is forgiven. Historically, that forgiven amount has been treated as taxable income under federal law.

In 2021, the American Rescue Plan Act (ARPA) changed that—temporarily. It exempted forgiven student debt from federal taxation for loans discharged under IDR, saving borrowers thousands of dollars. This is a significant savings for borrowers. Senator Elizabeth Warren, one of the champions of the provision who fought for its inclusion in the bill, estimated that a person earning $50,000 would save approximately $2,200 in taxes for every $10,000 of forgiven student loans.

That exemption is set to expire at the end of this year. And despite making room in the reconciliation bill for extending the tax cuts for the wealthy and making them permanent, Congressional Republicans left this vital protection for borrowers out. (One piece of good news is that it did extend the exemption for loans discharged due to death and disability, which had been passed in the Tax Cuts and Jobs Act of 2017 and was also set to expire at the end of the year. Balances forgiven under Public Service Loan Forgiveness have always been exempt.)

Income-driven repayment has been around since the 1990s, and so has the law that made IDR forgiveness taxable. But for years, the issue flew under the radar—few borrowers had been in repayment long enough to qualify. Furthermore, the Government Accountability Office (GAO) found significant issues that resulted in payments not being counted properly, delaying borrowers from forgiveness. In fact, GAO reported that the Department had approved forgiveness for a total of 157 loans under IDR as of June 1, 2021.

Without action from Congress, borrowers who reach loan forgiveness under IDR could see a significant increase in their federal tax bill in 2026. According to the last forgiveness announcement from the Department of Education (Department) under the Biden-Harris Administration, the average amount forgiven under IDR was approximately $40,000. If the exemption expires, that forgiven balance would be treated like additional earned income.

Based on that amount and recent tax rates and brackets, we can approximate how this will affect borrowers at different incomes. For example, a borrower earning $100,000 who has the average amount forgiven will see their tax bill jump by nearly $9,600. A borrower with the same debt, earning $60,000, would owe an additional $8,800.

Some would argue that those with the highest tax burden are likely those current borrowers who have high incomes and borrowed substantial amounts for graduate school and benefited from some of the existing plans that cap payment amounts at the required payment under the 10-year standard repayment plan, thus requiring them to pay their fair share. That is fair in many instances, but some higher earners did not reach that salary until much later in their careers. They could have been earning lower salaries for much of the 20 to 25 years they had been in repayment.

The new income-driven repayment plan in the bill also mitigates that problem because higher earners will have higher payments and are required to pay for 30 years, so they likely will have repaid more of their balances, and therefore will likely have lower tax bills.

But the worst of this will be felt by lower-income borrowers. For someone earning $30,000 a year, that could mean their tax bill grows by more than $7,000—money they almost certainly don’t have. That’s not just a bad surprise—it’s a crisis.

Imagine this: You played by the rules. You’ve made student loan payments for 20 or even 25 years. You’ve never missed a payment. You’ve paid interest. In some instances, the accruing interest has actually increased your balance beyond what you originally borrowed. And now, finally, you qualify for forgiveness. But instead of relief, you get a notice from the IRS. Not only are your loans not truly gone—you now owe thousands of dollars in taxes on them. That’s not a reward for decades of responsible repayment. It’s a punishment.

Many of these borrowers never saw the financial returns college was supposed to bring. They took on debt to improve their lives and climb the economic ladder, but their earnings never kept pace with their balances. So now, instead of writing the final check to the Department of Education, they’re being asked to send thousands to the IRS then.

For some borrowers, this is even worse because, according to one report, there are five states that tax forgiven student debt under state tax code: Arkansas, Indiana, North Carolina, Mississippi, and Wisconsin. (Pennsylvania taxed forgiveness until 2022, when it came to my attention as a staffer for Senator Bob Casey. The Senator and I worked with the Governor and his staff to exempt student debt forgiveness by revising a revenue tax bulletin.)

The bill’s silence on this looming tax bomb, while extending tax cuts for the wealthy, certainly feels like more than an oversight. It undercuts the entire premise of IDR and creates a one-time financial shock that could upend lives and push people back into debt. In fact, the additional revenue from letting this exemption expire is what helped pay for those tax cuts.

We should be building a student loan system that offers real relief and economic mobility—not one that traps borrowers in decades of payments only to hit them with a tax bill at the finish line. Congress can and should act to extend the tax exemption on student loan forgiveness. It’s as simple as passing the Student Loan Tax Relief Act, which has been introduced in previous Congresses. Anything less is a betrayal of the borrowers who’ve done everything right, but are punished for doing so.