Why Loan Forgiveness Can Be Like Swapping Student Debt for IRS Debt

Updated October 9, 2026, 8:56 a.m. ET

Student loan forgiveness will cost you again.

In 2021, Congress had exempted forgiven federal student debt, including balances forgiven under income-driven repayment (IDR) plans, from federal income tax. However, the provision expired at the end of 2025, making forgiven student debt balances taxable as income again starting this year.

That extra revenue from student loan forgiveness on IRS tax forms could double or even triple tax bills, a study from the nonprofit advocacy group Protect Borrowers said. Up to 3 million middle- and working-class families would be hit hardest over the next decade, the report said.

Additionally, nearly 13 million Americans, or nearly half of all federal borrowers in repayment, are enrolled in IDR plans and are progressing toward eventual forgiveness, it says.

“This tax bomb will force millions of working-class families, who have been diligently making their payments for two decades or more, to trade their student debt for debt to the IRS,” said Jennifer Zhang, policy, research and data analyst at Protect Borrowers and author of the report.

How much tax will result from student loan forgiveness?

Borrowers who get IDR forgiveness could see tax increases of about $6,000 to nearly $12,000 more depending on their income, tax status and family size, Protect Borrowers estimated.

Here are some examples:

Single borrowers without children could see about $1 in 4 of their pay go to federal taxes. These borrowers would pay the highest taxes at each income level: a single borrower earning $40,000 would pay more than $10,000 in federal taxes; a single borrower earning $60,000 would pay more than $15,000 in federal taxes; and a single borrower earning $80,000 would pay nearly $20,000 in federal taxes. After factoring in payroll taxes and state taxes, these borrowers could effectively see their net income cut by almost half.
Families could lose tax credits, such as the Earned Income Tax Credit and the Child Tax Credit, that they would have otherwise qualified for without the additional income from student loan forgiveness. The average married borrower who gets IDR forgiveness and has two dependents would normally receive a $3,102 tax credit, but with student debt forgiveness as income, it would cost them $7,206 in lost credits and additional taxes, while only earning $60,000 a year to support a household of four.
Low-income families would be those who would lose the most. A typical family of four earning just $40,000 a year would typically receive a tax credit of $8,854. Instead, canceling student debt would cost them $10,558 in lost credits and additional taxes. Their tax liability would increase to more than 11 times what it usually is.

Is forgiveness worth it?

Yes, student loan forgiveness is usually worth it, experts say.

“For most borrowers seeking IDR forgiveness, taxable tax forgiveness remains financially beneficial,” said Stacey MacPhetres, senior director of education finance at Bright Horizons, a provider of educational consulting services. “Even if a borrower owes taxes on the forgiven amount, the resulting tax bill is usually much less than the balance that was forgiven.”

Here is an example:

Pay the loan

Remaining student loan balance: $30,000
The borrower repays the entire balance.
Total cost: $30,000

Receive IDR forgiveness

Remaining balance forgiven: $30,000
Forgiveness is taxable.
Assume a tax bill of $5,000 to $7,000
Total cost: $5,000 to $7,000, not $30,000.

“The borrower is largely off the hook even before they pay their taxes,” she said. “The main challenge is not the amount of tax compared to the debt canceled., but the need to pay a potentially large one-off tax bill when filing taxes if forgiven. »

What should people do?

For those considering IDR forgiveness, borrowers should be reminded, MacPhetres said:

Start putting aside funds before filing your taxes.
Forgiveness can create a significant tax liability.
Taxes are generally due with their tax return the following spring (i.e., if forgiveness occurs in 2026, the borrower will generally report that income on their 2026 tax return, filed in April 2027).
Estimate the amount of the forgiveness and consult a tax preparer to estimate the tax liability.

What should I do if I can’t pay the tax bill?

The IRS offers payment plans, but interest and penalties can continue to accrue. Some plans also require a setup fee.

Is IRS debt worse than student debt?

It depends, said Richard Pon, a CPA in San Francisco. This is how he sees it:

IRS debt is sometimes worse:

– Interest is added daily to the balance, allowing interest to compound and balances to grow quickly, compared to simple interest for student loans. Student loan interest is only calculated on the principal balance.

– If the IRS garnishes your wages or seizes assets.

– If the IRS interest rate is higher than federal undergraduate loans, which is usually the case.

Student debt is sometimes worse:

– Because graduate loans and certainly private loans will exceed the IRS interest rate

Is there a tax exemption?

Tax-free student loan forgiveness is still possible in certain cases, Pon said, such as:

1. In case of insolvency or bankruptcy

2. When Public Loan Service Exemption is Available

3. Under the National Health Service Corps loan repayment program and certain state loan repayment programs that generally require an individual to work in an area where there is a shortage of health care professionals.

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