A $10K ‘tax bomb’ on student loan forgiveness started ticking New Year's Day 2026, threatening millions of borrowers with a new debt burden

As CNBC reports, the shockwaves could be enormous, adding up to thousands of dollars in unexpected taxes on forgiven loans (1) and hitting the very borrowers the IDR plan was meant to help, who tend to be lower-income.

According to the nonprofit group Protect Borrowers, those seeking forgiveness on the average $49,321 in student debt under the IDR plan in 2026 could see a loss of anywhere from $5,800 to $10,000 in owed taxes and lost credits (2).

Senator Elizabeth Warren, a member of the Senate Finance Committee, joined eight other senators in writing a letter to Treasury Secretary Scott Bessent asking him to prevent this (3).

“Families who earn student debt cancellation after paying their loans for decades will be hit with surprise tax hikes — as high as $10,000 in many cases — starting next tax year,” they wrote, describing the situation as a “financial disaster for working-class Americans.”

Here’s a look at what’s behind the ticking tax bomb and how to prevent it from wreaking havoc on your own financial plans.

Tax bomb effects on household budgets

As it stands, borrowers who make regular payments on student loans under the income-driven repayment (IDR) plan for 20 or 25 years can have their remaining loan balance forgiven, if eligible (4).

As New America reports, the American Rescue Plan Act (ARPA) of 2021 eliminated taxes on forgiven IDR student loans (5).

Unfortunately, that provision is expiring at the end of 2025, triggering the potential “tax bomb.”

With a median $600 in savings, most households — especially those dealing with significant amounts of student loan debt — could not cover an unexpected tax bill, especially in the thousands of dollars.

In fact, 37% of Americans couldn’t cover a $400 emergency expense, according to an Empower survey. (6).

If the money isn’t available, the likely course of action is to set up a payment plan with the IRS to pay down the newfound tax debt, but that means accruing interest and penalty charges until the debt is paid in full (7).

That means payments to the IRS could end up costing more than IDR plan payments.

Borrowers who don’t have the assets necessary to cover the tax debt might qualify for an insolvency exclusion through the IRS. In this case, the forgiven debt might be excluded from taxable income if the taxpayer’s total liabilities exceed their total assets (8).

But that’s a case-by-case situation. Most borrowers on the IDR plan must prepare for the possibility of significant tax bills when their federal student loan balance is forgiven. Read on to find out to do that.

How to prepare for this change

If you’re on the IDR student loan plan and would qualify for forgiveness in 2026, it’s a good idea to figure out how much you might owe in taxes on the forgiven amount.

Since this varies based on your income, loan balance and more, you’ll need to dig into those details to get a good idea of what you might owe.

Some might be pleasantly surprised by an expected tax bill of much less than $10,000. But if you expect you’d owe several thousand dollars, start making a plan on how you’ll deal with it.