After enduring decades of monthly payments, finally getting your student loans forgiven can be a huge relief. But before you wipe the sweat off your brow, you may have one more payment to make. And it could be a doozy.
Some types of federal student loan forgiveness are taxable again starting in 2026, which means the IRS will treat your canceled debt as income. If that forgiven balance is substantial, your one-year tax bill might exceed $10,000.
The federal government temporarily stopped taxing most forgiven or discharged student loan debt in 2021 through a provision in the American Rescue Plan Act. That provision expired at the end of 2025. A November 2025 letter sent by Massachusetts Sen. Elizabeth Warren and other Democrats to Acting IRS Secretary Scott Bessent expressed concern over the impact of what they referred to as an impending “tax bomb.”
Because the change could result in a sizable one-time tax increase, experts say you should begin planning now if you anticipate getting your education debt canceled in the next few years.
“If someone has a lot of (debt) taken away, it can raise their reported income for that tax year by a lot and possibly lead to a big tax bill,” says Steve Sexton, CEO of Sexton Advisory Group. “Ignoring it and hoping it will work itself out is the worst thing borrowers can do.”
[Read: Best Private Student Loans.]
Here’s Who Could Get Hit With a ‘Tax Bomb’
The change will impact borrowers who have federal loans that are in the Department of Education’s income-driven repayment plans. These plans calculate a person’s monthly payments based on a percentage of their discretionary income, often resulting in payments that are much lower than you’d owe in a standard plan. They also offer another attractive benefit: Once you make 20 or 25 years of qualifying payments, your remaining debt is canceled. (The amount of payments needed to reach forgiveness depends on the plan.)
If you’re awarded this time-based forgiveness after Jan. 1, 2026, you’ll now owe taxes on it. Borrowers with large initial loan balances or lower incomes — or a combination of the two — can often still have tens of thousands of dollars left on their loan when they reach their forgiveness milestone.
Some borrowers still won’t face any tax on their forgiven balances. For example, debt that’s canceled through the Public Service Loan Forgiveness program remains exempt from taxation. Also, borrowers who qualified and applied for forgiveness in 2025 but haven’t had their applications processed due to federal delays will be spared from a tax bill.
[Read: Best Student Loan Refinance Lenders.]
A $10,000 Tax Bill? How Much You Could Owe
While numerous factors can impact what you could ultimately owe the IRS, experts say borrowers with larger loan balances could get hit with a five-figure bill.
“A $50,000 debt forgiveness could result in a tax bill ranging from $5,000 to $18,500, with the average around $11,000 for those in the 22% tax bracket,” says Gene Bott, CPA, a tax advisor and partner at Tax Hive.
Certainly, many borrowers will have lower outstanding loan balances after decades of payments and thus a more manageable tax bill. But a considerable number of borrowers may wind up in the situation Bott describes.
About 13 million borrowers are in income-driven repayment plans, according to Department of Education data. Roughly 44% of those borrowers have student loan balances of at least $40,000.
Student loan forgiveness can raise your taxes in several ways. First, it’s simply more income that’s getting taxed. But that added income could also elevate you into a higher tax bracket. For example, if you’re a single filer making $50,000 in 2026, most of that income is taxed at a 12% rate. However, if you tack on $40,000 in forgiven debt, nearly all of that additional “income” would be taxed at 22%, since it would push you into the higher bracket once your income rises above $50,400.
Depending on your income and tax bracket, the forgiven debt could affect whether you qualify for some tax breaks.
“The higher tax bracket may also have additional consequences such as reducing the child tax credit and the earned income tax credit,” says Saidin M. Hernandez, principal attorney at BridgePointe Global Counsel who specializes in tax and estate planning.
[Read: Best Parent Student Loans: Parent PLUS and Private.]
What You Can Do to Prepare
If your student loan balance is forgiven, you’ll likely receive a 1099-C form that notifies you that your debt was canceled and will be considered income by the IRS. If you haven’t already started preparing for the tax bill, this is the time to begin.
“What you need to do is really get a sense of what your income situation is going to be,” says Andy Smith, executive director of financial planning at Edelman Financial Engines.
He says you should try to estimate how much income you’ll earn in 2026 and how large of a student loan balance will be forgiven. With that information, you can then do some rough calculations to get a sense of the size of your extra tax bill based on your tax bracket. Once you have that estimate, try to start budgeting for that payment as you might do for a large purchase or a vacation you have planned in the future.
Smith suggests crunching the numbers earlier in the year to allow for more time to make adjustments to your budget if needed. Your state may also tax your loan forgiveness, so don’t forget to check those regulations as well when considering your overall bill.
In addition to setting money aside, you may also want to explore ways to reduce your tax bill, says Bott.
“For instance, if you can contribute to retirement accounts, you might lower your taxable income and lessen the impact of debt forgiveness,” he says.
Experts say even if you typically file taxes on your own, you may want to make an exception and work with a tax professional to get advice on reducing your bill.
If your tax bill is simply too high for you to pay, Bott says you can try applying for an offer in compromise to settle your debt with the IRS. This involves providing financial information to establish that you are either unable to pay the bill or that doing so would create financial hardship. The IRS may accept your offer to pay a lower amount.
Another option is to set up a payment plan with the IRS, allowing you to pay off the tax in installments rather than as one lump sum. However, this option could involve additional fees and interest.
Even if you’re still several years away from forgiveness, experts say it can pay off to start preparing for potential taxes now.
“If you think you’ll be forgiven in the next few years, start thinking about what that balance could be and how it might affect your taxable income that year,” says Sexton. “Don’t wait until the year the forgiveness happens; that’s the key. Borrowers can deal with the tax effects without ruining their finances if they plan ahead.”
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Student Loan Forgiveness ‘Tax Bomb’: Why You Could Owe $10K or More originally appeared on usnews.com
