A new report warns that 2 to 3 million borrowers could face thousands in new IRS bills after student loan forgiveness lost its federal tax exemption.
Forgiven student debt is taxable again, and the hit could be severe for people who spent years chasing cancellation under income-driven repayment plans.
Newsweek reported on findings from Protect Borrowers estimating that between 2 million and 3 million Americans could face federal taxes on canceled balances over the next decade as they reach forgiveness. The temporary federal tax exclusion for qualifying canceled student loan debt expired on December 31, 2025. Beginning with the 2026 tax year, forgiven balances under income-driven repayment can again count as taxable income unless Congress changes the law.
That is not a small paper adjustment. Protect Borrowers modeled extra costs ranging from $6,000 to nearly $12,000 for some households, using 2026 federal tax guidelines and Department of Education student loan data.
Nearly 13 million Americans are enrolled in income-driven repayment plans and making progress toward potential cancellation. Not all of them will get taxable forgiveness. Roughly 2 million to 3 million could become eligible and run into the federal tax consequences during the next decade, according to the report.
Congress created a temporary carve-out under the American Rescue Plan Act in 2021. It excluded qualifying canceled student loan debt, including debt canceled through income-driven repayment, from federal taxable income. That break lasted only through the end of 2025.
Public Service Loan Forgiveness and Teacher Loan Forgiveness remain federally tax-free. Time-based forgiveness through income-driven repayment is the category now exposed again.
Borrowers generally can earn cancellation after 20 to 25 years under qualifying income-driven plans. A newer Repayment Assistance Plan under the One Big Beautiful Bill Act allows cancellation after 30 years of eligible payments. Either way, the tax treatment after the exemption’s end is what changes the math.
The average balance canceled through income-driven repayment is $49,697, the report found. Most borrowers who already received that kind of cancellation made less than $50,000 a year in 2022, about $60,000 in 2026 dollars after an inflation adjustment.
Protect Borrowers walked through household examples that show how fast the bill grows once canceled debt is treated as income and tax credits shrink.
A household earning $60,000 would ordinarily receive an estimated $3,012 tax credit under the report’s assumptions. With canceled student debt counted as income, that household would face $7,206 in additional taxes and lost tax credits, more than three times the ordinary burden in the model.
A family of four making $40,000 would ordinarily receive a tax credit of $8,854. Taxing the canceled debt produces $10,558 in additional taxes and lost credits in the same modeling, more than ten times the usual level.
After income-driven cancellation, a single borrower earning $40,000 could pay more than $10,000 in federal taxes. A single borrower earning $60,000 could pay more than $15,000, the report estimated.
Someone earning $60,000 who has roughly $50,000 forgiven can end up with taxable income that includes both regular earnings and the canceled balance. The relief removes a loan. It does not automatically fund the tax payment that may follow.
Michael Ryan, a finance expert and founder of MichaelRyanMoney.com, put the core problem in plain terms when he spoke with Newsweek.
"Forgiveness doesn't put a dime in your checking account. The IRS still wants actual cash,"
Ryan said. He added that the bill can erase emergency savings, delay retirement contributions, or push someone into installment payments with the IRS, often in their 40s, 50s, or 60s, years that are hard to replace.
"The biggest risk is to borrowers with large balances, modest incomes, and little savings. Families can get hit twice when the forgiven debt also reduces valuable tax credits,"
Ryan said. He noted that some borrowers spent 20 or 25 years making exactly the payments the program required. “The debt relief is real,” he said, “But eliminating a loan balance isn't quite the financial fresh start people imagine when the tax bill arrives.”
Kevin Thompson, CEO of 9i Capital Group and host of the 9innings podcast, warned that the liability can shove people backward financially.
"This may put many borrowers right back into a hole, especially those who can ill afford to see their wages reduced,"
Thompson said. Once the loans are forgiven, he said, the tax bill becomes an IRS collection matter, and the government can pursue wage garnishments, liens, and other tools. Failure-to-pay penalties and interest can keep building, moving the burden from the student loan system to the tax system.
Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, described the policy whiplash facing long-term payers.
"Treating that forgiveness amount as taxable income could double or triple some tax bills year-over-year and put tremendous hardship on individuals and families on the other end,"
Beene said. In his view, the change essentially shifts the debt from one ledger to another, with the IRS overseeing payment.
Income-driven repayment sold a long runway: keep making income-based payments for decades, then see the remaining balance canceled. For a stretch after 2021, federal law also treated much of that cancellation as nontaxable. That combination encouraged borrowers to treat forgiveness as a clean finish line.
The finish line did not stay clean. The American Rescue Plan exclusion was always temporary. When it lapsed at the end of 2025, standard tax treatment returned for affected income-driven forgiveness in the 2026 tax year. Canceled principal can raise adjusted income, cut credits, and produce a balance due that has to be paid in real dollars.
Protect Borrowers advocates student debt relief and framed the restored tax treatment as a serious burden for people on modest incomes. The figures it published still show the hard edge of the design: average cancellations near $50,000, multi-thousand-dollar modeled tax increases, and millions of potential cases over a decade.
No official IRS or Education Department statement on 2026 collections appears in the Newsweek account. What the reporting does establish is the statutory timeline, the report’s cost ranges, and the practical warning from finance commentators that a forgiven loan and a paid tax bill are not the same event.
Borrowers still working through 20-, 25-, or 30-year clocks now have to plan for a tax outcome that a temporary law papered over and then dropped. Families already stretching paychecks are the ones the models show absorbing the largest relative shock when credits shrink and canceled balances land on a return.
Washington can advertise debt relief as compassion. When the tax holiday ends and the IRS bill comes due, taxpayers learn again that canceled balances are not free money, they are costs shifted onto another form, often onto people least able to pen a sudden check.
