Forgiven student debt becomes taxable income again as five-year US exclusion lapses
Borrowers in income-driven plans face up to nearly $12,000 extra federal tax, the lender and the tax collector are the same government
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U.S. President Donald Trump and Secretary of Education Linda McMahon during an event in the Rose Garden of the White House on August 24, 2026 in Washington, DC.
newsweek.com
A five-year federal exemption that kept canceled student debt off US tax returns expired at the end of 2025, and borrowers receiving forgiveness through income-driven repayment plans this year are finding the cancellation itself taxed as income. The nonprofit Protect Borrowers puts the cost at roughly $6,000 to nearly $12,000 in additional federal taxes and lost credits, depending on income and family size.
The IRS generally treats canceled debt as taxable unless an exclusion applies: a liability that disappears still counts, in the tax code's accounting, as money the borrower gained. The student-debt exemption covered discharges from the start of 2021 through the end of 2025 and was not extended for income-driven repayment beyond that. The plans themselves continue to run — monthly bills are set by income and family size, and the remaining balance is forgiven after 20 or 25 years of qualifying payments, dropping the entire canceled sum into a single tax year.
Protect Borrowers modeled a national average canceled balance of $49,697 against incomes of $40,000, $60,000 and $80,000, for single borrowers without children, single parents with two dependents and married couples with two children. A single borrower earning $60,000 would owe $15,303 in federal tax after cancellation, against $4,720 if the debt had not been taxed — an extra $10,583. At $80,000 of income, the added cost runs from $5,964 for a married borrower with two dependents to $11,641 for a single borrower with none. Nearly 13 million Americans are enrolled in the plans and accumulating progress toward cancellation; the group expects 2 million to 3 million to become eligible — and exposed to the bill — over the coming decade.
Alex Beene, who teaches financial literacy at the University of Tennessee at Martin, told Newsweek the result could be "a tax bill double or triple the usual one," arriving on households already stretched by inflation.
The canceled balance never passes through the borrower's bank account. From this year, it passes through the tax return instead.