CA, US & World
Student Loan Forgiveness Could Bring Unexpected Tax Bills for Millions of Borrowers
Millions of Americans who have spent decades paying down student loans could face an unexpected tax bill when their remaining debt is forgiven, according to a new report from the nonprofit Protect Borrowers.
The report, “Fleeced at the Finish Line: The Tax Bomb Coming for IDR Borrowers,” warns that a federal tax exemption for student loan forgiveness expired at the end of 2025. Beginning with the 2026 tax year, debt canceled through qualifying income-driven repayment plans will generally be treated as taxable income under federal law.
Income-driven repayment plans base monthly student loan payments on a borrower's income and family size. Depending on the plan, borrowers can qualify to have their remaining balances forgiven after making qualifying payments for 20 to 25 years. A newer repayment plan has a 30-year repayment period.
Aissa Canchola Bañez, policy director for Protect Borrowers, said California is among the states expected to have the largest number of borrowers potentially affected.
"California is one of the states that will see the greatest number of borrowers potentially subjected to the 'tax bomb' over the next decade. According to our analysis, it's up to 271,000 borrowers," Canchola Bañez reported.
The organization's analysis estimates that between 2 million and 3 million Americans could face the tax consequences over the next decade. It estimates the average amount of debt canceled through income-driven repayment was nearly $50,000 in 2025.
The potential impact can be substantial. In one example, the report estimates a married household earning $60,000 a year with two dependents could face an additional $7,206 in federal taxes and lost tax credits after student loan debt is canceled. The report says the tax increases could range from about $6,000 to nearly $12,000, depending on income and household circumstances.
Canchola Bañez is urging Congress to revisit the issue after the midterm elections, during the lame-duck session.
"We are calling for Congress to extend the tax exemption permanently so that these borrowers are not penalized for essentially doing everything right, making their payments for over two decades," Canchola Bañez stressed.
There is an important distinction for California borrowers: The federal tax change does not automatically mean the same debt forgiveness will be taxed by the state. California's Legislative Analyst's Office says the state has long excluded certain loans forgiven automatically after 20 or 25 years of repayment from state income taxes. Other types of student loan forgiveness have different state tax rules.
The report argues that borrowers who have spent decades making payments should not face a large tax obligation when they finally qualify for debt relief. Protect Borrowers is asking Congress to make the federal tax exemption permanent.
By: NBC Palm Springs
November 14, 2026
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