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Student loan borrowers who are entitled to debt forgiveness but haven’t been able to get it under the Trump administration may face an “enormous tax liability,” the American Federation of Teacher said in a new court document.
The teacher’s union, which represents some 1.8 million members, launched its legal challenge against the U.S. Department of Education in March, and is now seeking class action status.
The AFT has said Trump officials are denying borrowers access to student loan forgiveness programs, including income-driven repayment plans, or IDRs. Those plans tie a borrower’s monthly bill to their income and lead to debt cancellation after a certain period.
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“[A]ny borrower who is currently eligible to have their loans cancelled under an IDR plan, such as IBR, but whose cancellation is being withheld by the Department, risks this cancellation being taxed as federal income if the cancellation is not processed before January 1, 2026,” the filing reads.
The U.S. Department of Education did not respond to a request for a comment.
Here’s what borrowers need to know.
Student loan forgiveness is taxable again soon
A law that shielded student loan forgiveness from taxation is expiring this year.
The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. President Donald Trump’s “big beautiful bill” did not extend or make permanent that broader provision.
Without action from Congress, student loan borrowers who get their debt forgiven under the U.S. Department of Education’s income-driven repayment plans, or IDRs, would face a federal tax bill again starting in 2026. IDR plans cap people’s monthly payments at a share of their discretionary income and cancel any remaining debt after a certain period, typically 20 years or 25 years.
Even under current law, borrowers may face a state tax bill depending on where they live.
At the same time, delays in forgiveness
As time runs out for student loan forgiveness to be tax-free at the federal level, hundreds of thousands of borrowers who have requested to be enrolled in a repayment plan that leads to debt cancellation are stuck in limbo under the Trump administration.
According to court records, as of July 31, more than 1.3 million borrowers are stuck in a backlog of IDR plan applications. Meanwhile, 72,730 people are waiting for a determination on their Public Service Loan Forgiveness status. PSLF leads to loan forgiveness after a decade for public servants and certain non-profit workers.
Unless the U.S. Department of Education “acts quickly” to forgive the debt of eligible borrowers, they “could face significant tax bills on debt relief that should have been granted to them without penalty,” lawmakers, including Sen. Bernie Sanders, I-Vt., recently wrote in a letter to Education Secretary Linda McMahon.
Loan forgiveness tax liability could be significant
The tax bill on student loan forgiveness can be substantial.
The average loan balance for borrowers enrolled in an IDR plan is around $57,000, higher education expert Mark Kantrowitz recently told CNBC.
For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of more than $12,000, Kantrowitz estimated. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.
More borrowers could also be on the hook for state taxes. Many states mirror the federal government’s tax policy on student loans, meaning more states may start to levy the aid next year as well, experts say.
Debt relief granted under the Public Service Loan Forgiveness program is not subject to federal taxes, although borrowers may owe their state a bill.
What to do about the possible tax bill
Borrowers who expect they’ll become eligible for student loan forgiveness in 2025 “should save all payment records with their servicers,” said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.
“If necessary, they can use this information to prove they were entitled to forgiveness during a year in which it is not subject to tax,” Nierman said.
For borrowers who anticipate the relief after Jan. 1, 2026, Nierman recommends starting to plan for the tax bill by salting away some money when you can in preparation.
Borrowers often don’t have to pay the entire tax bill in one sum, she added.
“They can request a plan through the IRS to spread the payments over a longer period of time,” Nierman said. Meanwhile, if your liabilities exceed your assets or you’re dealing with a serious financial hardship, you may be able to reduce or eliminate the bill altogether, she said.