Student-loan borrowers who make enough payments could get debt relief — and a big tax bill this year

• A 2021 provision that made student-loan forgiveness tax-free expired on January 1.
• Borrowers who become eligible for forgiveness in 2026 could face a big tax bill.
• The Education Department said that borrowers who complete their payments before 2026 would not be taxed.

Student-loan forgiveness isn't certain — but taxes are.

On January 1, a provision in former President Joe Biden's 2021 American Rescue Plan that made student-loan forgiveness tax-free expired. It means that student-loan borrowers who qualify for student-loan forgiveness in 2026 could face thousands of dollars in new taxes alongside their debt relief.

It's a concern for borrowers who are close to reaching their qualifying number of payments on an income-driven repayment plan or the Public Service Loan Forgiveness program, which forgives student debt for government and nonprofit workers after 10 years of qualifying payments.

For example, Misty Knapp, a 59-year-old student-loan borrower enrolled in PSLF, told Business Insider that she's just six payments away from reaching debt relief, but she doesn't think she can afford the taxes that would come with the forgiveness.

"I don't know what that's going to look like, but if I'm taxed on the amount that's forgiven, that would be a lot of money," Knapp said.

Additionally, the Department of Education was working through a backlog of income-based repayment applications in 2025, meaning some borrowers who reached their payment threshold were left waiting for relief.

The department reached an agreement with the American Federation of Teachers in October to make sure that if a borrower reached their qualifying number of payments in 2025, they would not be subject to the new 2026 taxes, even if the department was still processing their claim in the new year.

Still, the agreement said that the Internal Revenue Service and the Treasury Department would have the "final say" on whether a borrower's forgiveness would count as taxable income, not the Department of Education.

Democratic lawmakers expressed concern with what they called the looming "tax bomb" set to hit borrowers. In November, Sen. Elizabeth Warren led some of her colleagues in sending a letter to Treasury Secretary Scott Bessent, urging him to use his authority to reverse the expiration of the tax-free provision.

The lawmakers cited an analysis from advocacy group Protect Borrowers, which found that the average borrower on an income-driven repayment plan who receives debt relief could face losses between $5,800 and $10,000.

"By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers," the lawmakers wrote.