Beginning in 2026, many federal student loan borrowers who receive loan forgiveness through Income-Driven Repayment (IDR) plans may again face federal income tax liability on the amount forgiven. This shift marks the expiration of a key borrower protection enacted under the American Rescue Plan Act (ARPA) of 2021, which temporarily excluded most student loan forgiveness from federal taxation.

Because many borrowers are approaching IDR forgiveness eligibility after decades in repayment, this change has significant implications for institutional advising, borrower communication, and long-term financial planning.

Background: Expiration of the Tax-Free Forgiveness Provision

Under ARPA, federal student loan forgiveness—including forgiveness granted through IDR plans—was excluded from taxable income for tax years 2021 through 2025. That provision expired on December 31, 2025, and recent federal legislation did not extend or make it permanent.

As a result, student loan balances forgiven in 2026 or later under IDR plans will once again be treated as taxable income at the federal level, unless future legislation reinstates an exclusion.

Which Borrowers Are Affected?

The renewed taxability applies specifically to Income-Driven Repayment plans, which cap monthly payments based on a borrower’s income and forgive any remaining balance after 20 or 25 years of qualifying repayment, depending on the plan.

Borrowers enrolled in these plans often carry substantial remaining balances at the point of forgiveness. Once taxable, that forgiven amount is added to the borrower’s income for the year in which the discharge occurs, potentially increasing their tax bracket and overall tax liability.

Importantly, Public Service Loan Forgiveness (PSLF) remains tax-free under federal law. Borrowers receiving forgiveness after 120 qualifying payments while working in eligible public service employment are not affected by this change.

Potential Financial Impact

The tax consequences of IDR forgiveness can be significant. With average IDR balances exceeding $50,000, borrowers may face federal tax bills in the thousands of dollars in the year forgiveness occurs. In addition to federal taxes, some borrowers may also incur state income tax liability, depending on state law.

Beyond the immediate tax bill, an increase in reported income could affect:

  • Eligibility for income-based tax credits and deductions
  • Premium subsidies for health insurance
  • Other income-tested benefits or obligations

This combination of effects is often referred to as the “IDR tax bomb.”

Special Consideration for Borrowers Eligible in 2025

A critical clarification affects borrowers who became eligible for IDR forgiveness in 2025, even if their loans are not officially discharged until later. Under recent guidance tied to a legal agreement, borrowers who established eligibility for forgiveness before the end of 2025 will continue to qualify for tax-free treatment.

Borrowers in this category should retain any dated documentation confirming their eligibility status, as this may be necessary to substantiate the tax exclusion if forgiveness is processed after 2025.

Planning Challenges and the Loss of Federal Tracking Tools

Preparing for IDR forgiveness has become more difficult due to the removal of the repayment tracking tool previously available on StudentAid.gov. The Department of Education has indicated that it does not currently plan to reinstate this tool, making it harder for borrowers to independently determine when they will reach forgiveness eligibility.

As a result, borrowers may need to rely more heavily on loan servicer records, historical payment data, or professional assistance to estimate forgiveness timelines and associated tax exposure.

Guidance for Financial Aid Administrators

Financial aid administrators play a key role in helping borrowers understand and prepare for this change. Recommended areas of focus include:

  • Awareness and Education: Ensure borrowers enrolled in IDR plans understand that forgiveness after 2025 may be taxable.
  • Documentation: Advise borrowers to retain records showing forgiveness eligibility dates.
  • Financial Planning Referrals: Recommend early planning with qualified financial or tax professionals to estimate tax liability and explore savings strategies.
  • Payment Options: Inform borrowers that IRS payment plans may be available if they cannot pay the full tax liability immediately.
  • The return of federal taxation on IDR loan forgiveness represents a major policy shift with long-term implications for millions of borrowers. While the change does not affect PSLF, it reintroduces significant financial planning considerations for borrowers relying on IDR forgiveness after decades of repayment. By proactively educating borrowers and integrating this update into advising practices, financial aid administrators can help mitigate confusion and support borrowers in preparing for a potentially substantial tax obligation beginning in 2026. If you have any questions or concerns regarding the impact of these changes, never hesitate to reach out to our Title IV compliance team at info@heag.us. We have representatives ready and available to help you track and plan your response for these ongoing changes.

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