Govind Tekale
More than a million student loan borrowers could face unexpected tax bills as a result of processing delays in loan forgiveness applications. The backlog of Income-Driven Repayment (IDR) plan applications has reached 1,076,266, with the Trump administration processing roughly 305,000 applications in August.
The concern stems from a critical deadline: the American Rescue Plan Act (ARPA) made most student loan forgiveness tax-free at the federal level, but only through December 31, 2025. After that date, forgiven student loans will generally be taxable as income.
“If eligible IDR borrowers’ cancellations are processed in 2026 instead, the relief could be taxable income federally,” said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York.
Financial expert Mark Kantrowitz estimates the tax impact could be substantial. With the average IDR loan balance around $57,000, borrowers in the 22% tax bracket could face a tax bill exceeding $12,000. Those in the 12% bracket might still owe around $7,000.
The backlog extends beyond IDR applications. Over 74,510 borrowers are waiting for decisions on Public Service Loan Forgiveness (PSLF) Buyback requests. At current processing rates, clearing these backlogs could take more than a year – pushing many borrowers past the tax-free deadline.
This issue has caught the attention of lawmakers, including Senator Bernie Sanders, who recently wrote to Education Secretary Linda McMahon urging faster action. “Unless the U.S. Department of Education acts quickly to forgive the debt of eligible borrowers, they could face significant tax bills on debt relief that should have been granted to them without penalty,” the letter stated.
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Ellen Keast, deputy press secretary for the Education Department, defended the administration’s efforts: “The Trump administration is actively working with federal student loan servicers and hopes to clear the Biden backlog over the next few months.”
The situation is further complicated by state taxes. Five states – Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin – currently tax some forgiven student loan debt regardless of federal tax treatment.
Not all forgiveness programs face the same tax implications. Public Service Loan Forgiveness remains tax-free federally even after 2025, as does forgiveness for borrowers who become totally and permanently disabled.
Financial advisors recommend borrowers take proactive steps. “Borrowers who expect they’ll become eligible for student loan forgiveness in 2025 should save all payment records,” Nierman advised. “If necessary, they can use this information to prove they were entitled to forgiveness during a year in which it is not subject to tax.”
For those who might face forgiveness in 2026 or later, experts suggest starting to save for potential tax bills now. The IRS does offer payment plans for those unable to pay their tax bill all at once.
Meanwhile, forbearances and deferments have ballooned to 10.3 million and 3.4 million borrowers respectively, reflecting widespread affordability issues and administrative uncertainty in the student loan system.
