There is another financial hurdle ahead for student loan borrowers whose debt was forgiven.
CNBC reported that a portion of the American Rescue Plan Act of 2021 expired. The bill stated that students whose loans were forgiven between Dec. 31, 2020, and Jan. 1, 2026, would not be taxed at the federal level, according to a news release.
As a result of the bill expiring in December, millions of student loan borrowers who had their loans forgiven by the U.S. Department of Education through income-driven repayment (IDR) plans will be impacted. These plans consider income and family size, with some payments as low as $0 a month, according to Federal Student Aid. After 20 to 25 years of payments, the remaining balance may be forgiven, notes the agency.
Higher education expert Mark Kantrowitz estimated to CNBC that, on average, the loan balance for those enrolled in an IDR plan was nearly $57,000. Those in the 22% tax bracket would face a financial hurdle of more than $12,000 in taxes if their balance was forgiven. For those in the 12% bracket, that amount would be nearly $7,000, he told the outlet.
CNBC reported that those whose last payment was in 2025 likely will not have to worry about their debt becoming taxable, and they are encouraged to save the documentation that clarifies their debt was cleared in that year.
Impacted borrowers are those whose last payment on their IDR plan was in 2026. Per CNBC, these student loan balances will count as taxable income beginning this year, meaning borrowers could move into a higher tax bracket, which could also mean that certain tax breaks may lessen or disappear.
Consider working with a tax professional or financial advisor to be well-positioned for tax season.
“Hopefully, you can take the amount you were paying on your loans, start putting that aside and building up a pot of money,” Ethan Miller, a certified financial planner and founder of Planning for Progress in the Washington area, told the outlet.
Options that could provide relief include signing up for an offer in compromise, an agreement with the IRS that “settles tax liabilities for less than the full amount that you owe,” according to information on the IRS’ website. Borrowers can also consider applying for a short-term or monthly payment plan if their tax liability, including balance, penalties, and interest, doesn’t exceed $50,000, notes CNBC.
Plans that will not be impacted by the expired bill are Public Service Loan Forgiveness, Teacher Loan Forgiveness, Borrower Defense, and the Total and Permanent Disability Discharge, Kantrowitz told CNBC.
