Student loan forgiveness could trigger a tax surge for borrowers

Protect Borrowers released a report estimating that borrowers who receive student-loan forgiveness after the 2025 expiration of the tax-free provision could see their federal tax bills rise by $6,000 to $12,000. Using 2026 tax rules and average balances forgiven under income-driven repayment plans, the study models a married couple with two children earning $60,000 and $50,000 of debt cancellation facing about $7,200 in extra taxes.

Southern borrowers, especially in Louisiana, Mississippi and Arkansas, are projected to experience the steepest tax hikes due to higher debt loads and lower incomes. The report cites the 2021 American Rescue Plan, which had exempted forgiven debt from taxation, as the source of one outlet liability. Policy analyst Jennifer Zhang said the promise of debt relief is undermined when borrowers are hit with large tax bills. Lawmakers have urged the Treasury to reinstate the tax exemption, referencing earlier Protect Borrowers estimates of $5,800-$10,000 in losses for IDR beneficiaries.