:max_bytes(150000):strip_icc()/TheTaxCutsandJobsAct-final-10cb3df423c348f98d7c5dddca9ed54d.png "Some Student Loan Borrowers Could Face a Giant Tax Bill if the Government Doesn’t Take Action Soon")
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KEY TAKEAWAYS
- The Department of Education has temporarily paused student loan forgiveness under all income-driven repayment plans. Borrowers who have already reached the number of payments required to have their loan discharged are unsure of when they will receive their forgiveness.
- If forgiveness does not resume before the end of the year, borrowers may unexpectedly have to pay thousands of dollars in taxes when they eventually do receive forgiveness.
- As a result, borrowers are in limbo, waiting for guidance about when they will get their loans discharged and if they will have to pay taxes on them.
Some federal student loan borrowers could face a surprisingly large 2026 tax bill if they don’t receive their loan forgiveness by the end of this year.
Several months ago, the Department of Education temporarily paused loan forgiveness under all income-driven repayment plans to comply with a court ruling from earlier this year. Borrowers who should have received their forgiveness this year anxiously await its resumption, hoping it will come before they are taxed on it.
Typically, student loan borrowers can get the remainder of their loans discharged after 20 or 25 years of qualifying payments under an income-driven repayment plan. This year, however, many borrowers have not received their forgiveness, although they have already met the required number of payments.
Borrowers are running out of time, because a temporary tax rule created by former President Joe Biden allowing forgiveness to be tax-free is set to end after 2025.
Why This Might Matter to You
If you’re a federal student loan borrower who completed the required number of payments to qualify for forgiveness under an income-driven repayment plan, but have not yet had your loans discharged, you could face an unexpected tax bill if forgiveness isn’t reinstated soon.
The way the tax rule is currently written, borrowers whose forgiveness is processed in 2026 or later — even if they reached their required payments in 2025 — will have to pay taxes on the amount that was forgiven.
“Borrowers who satisfy the requirements for loan cancellation through the end of 2025 are entitled by statute to this tax treatment, the consequences of which are extremely significant for individuals,” the American Federation of Teachers said in a request for a preliminary injunction, which would require the Department of Education to resume forgiveness before the end of the year.
The Department of Education did not respond to a request for comment in time for publication. The Internal Revenue Service directed Investopedia to talk with local tax experts.
A Ruling Could Be Retroactive
Rob Burnette, a registered tax preparer and CEO of financial advisory firm Outlook Financial Center, said Congress could potentially rule that taxes will not apply to borrowers who reached the payment requirement in 2025, or extend the tax rule.
With Congress tied up in debates surrounding cuts to federal healthcare programs and a looming government shutdown, however, it may not make a ruling by the end of this year.
Fortunately, the government will have some time to make a retroactive ruling. Since any forgiveness processed next year will show up on 2026 tax returns that are filed in 2027, the government has more than a year to ease the tax burden of those whose forgiveness was delayed past the cutoff.
What Happens Next
More clarification about the future of income-driven repayment plans and tax-free forgiveness may come soon. Both parties involved in the lawsuit which is blocking the Saving for a Valuable Education plan and pausing forgiveness under all other income-driven repayment plans, will meet on Oct. 3. At this meeting, both parties will be required to give a status report and create a schedule for the remainder of the court case.
This meeting could help guide borrowers through what will happen next. Separately, a lawsuit filed by the American Federation of Teachers requested an injunction so that the Department of Education can resume forgiveness before the year ends.
Until these lawsuits are resolved or forgiveness resumes, borrowers waiting for their loans to be discharged should continue making payments. A spokesperson from the Department of Education previously told Investopedia they will be refunded for overpayments later.
Borrowers can also apply for forbearance to pause their payments until they receive forgiveness, recommended Betsy Mayotte, president of non-profit student loan advice provider The Institute of Student Loan Advisors.
