The good news: student-loan forgiveness is back on. The bad news: borrowers who get it could face thousands of dollars in new taxes next year.
On Monday, Sen. Elizabeth Warren led a group of her Democratic colleagues in sending a letter to Treasury Secretary Scott Bessent, exclusively viewed by Business Insider, calling on him to use his authority to prevent a “tax bomb” from hitting student-loan borrowers next year. The lawmakers are referring to a 2021 provision in the American Rescue plan that made student-loan forgiveness tax-free, and the provision is set to expire in January 2026.
It means that borrowers who complete their payments on income-driven repayment plans in 2026 could face thousands of dollars in new taxes due to the expiration of the provision. An analysis by advocacy group Protect Borrowers said borrowers who receive the average amount of debt canceled under income-driven repayment plans could face losses between $5,800 and around $10,000. It would be a “financial disaster for working-class Americans,” the letter said.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program,” the lawmakers said.
The lawmakers outlined several legal authorities they said the administration could use to prevent new tax bills on student-debt relief. One authority the lawmakers referenced is a general welfare exclusion; they said that income-driven repayment plans, by nature, suggest a borrower’s demonstrated need since payments are based on income, and loan forgiveness would promote the borrower’s general welfare.
This letter follows the Trump administration’s resumption of student-loan forgiveness for borrowers on income-based repayment plans. In early October, the Department of Education resumed processing relief for borrowers who reached the required number of payments after pausing the program earlier in the year.
Notably, the discharge notices that borrowers received said that the date they completed their qualifying payments would be considered the effective date of the relief. So, if a borrower reached their qualifying number of payments in 2025 but did not receive relief until 2026, they would not face new taxes due to the 2025 effective date.
The Department of Education also reached an agreement with the American Federation of Teachers in a legal filing to process more income-driven repayment applications. It follows a lawsuit the AFT filed earlier this year, accusing the department of delaying paperwork processing.
The administration has not commented on whether it will use its authority to prevent taxes on student-loan forgiveness next year.
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