Private-sector borrowers nearing the end of their IDR terms are the group most likely to face what advisers describe as a “tax bomb.” According to higher-education analyst Mark Kantrowitz, the average outstanding balance for IDR participants is about $57,000. If that amount is forgiven in 2026, a taxpayer in the 22 percent bracket would owe roughly $12,500 in federal income tax; someone in the 12 percent bracket would still face a liability of around $7,000. State income taxes could add to the burden in jurisdictions that treat discharged debt as taxable income.
The potential reach is significant: more than 42 million Americans hold federal student loans, and total outstanding education debt exceeds $1.6 trillion, Department of Education data show.
Relief Granted in 2025 Remains Tax-Free
Federal officials recently clarified that borrowers who become eligible for forgiveness during calendar year 2025 will retain the tax-free treatment even if their balances are not officially discharged until 2026 or later. The clarification emerged from a legal settlement involving the American Federation of Teachers and the Trump administration. Advisers recommend that borrowers who receive written confirmation of 2025 eligibility save that documentation, as it may be required to prove entitlement to the exemption once the provision has expired.
Tracking Eligibility Has Become Harder
The Education Department previously offered an online tool on StudentAid.gov that estimated borrowers’ progress toward IDR forgiveness. The tool was removed earlier this year, and the department has stated in court filings that there are no plans to restore it. Without that resource, borrowers must rely on loan-servicer records or consult advisers to calculate their qualifying payment counts and estimated discharge dates.
Planning Strategies Before the Deadline
Certified financial planners who specialize in education debt recommend several steps for borrowers likely to see their loans forgiven in 2026 or later:
1. Establish the timeline. Confirm the precise month and year you will meet the 20- or 25-year requirement. Knowing the date allows for an accurate estimate of taxable income in the year of discharge.
2. Project tax liability. Use current marginal tax brackets and your expected income to estimate potential federal—and, where applicable, state—tax. The projection should account for how the forgiven balance could push total income into a higher bracket.
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3. Set funds aside in advance. Planners suggest creating a dedicated savings vehicle, such as a high-yield savings account or a short-term Treasury fund, to accumulate the anticipated tax payment over several years.
4. Review payment-plan options with the IRS. If full payment at filing is not feasible, the Internal Revenue Service offers installment agreements. Details are available on the agency’s official website.
5. Monitor legislative developments. Although no proposal to renew the tax break has advanced in Congress, future legislation could alter the landscape. Staying informed will help borrowers adjust plans promptly if the law changes.
Potential Impact on Tax Credits and Deductions
The inclusion of a large forgiven balance in adjusted gross income can also affect eligibility for deductions and credits. Benefits tied to income thresholds—such as the Child Tax Credit, Saver’s Credit, or certain education credits—could be reduced or eliminated in the year forgiveness occurs. Assessing these secondary consequences is a key part of advance tax planning, advisers note.
State Tax Considerations
States vary widely in their treatment of discharged debt. Some automatically follow federal rules, while others decouple and apply their own definitions of taxable income. Borrowers should check guidance from their state revenue department or consult a tax professional to determine whether additional liabilities will arise.
No Change for Public Service Borrowers
While most IDR participants must brace for taxation after 2025, borrowers pursuing PSLF do not face the same risk. The program’s forgiveness remains explicitly exempt from federal income tax, and most states also exclude PSLF balances. Government and nonprofit employees who anticipate PSLF discharge should nonetheless keep thorough records of qualifying payments, but no federal tax payment will be due at the time of forgiveness under current law.
With the expiration date now less than two years away, financial planners emphasize early action. Identifying the likely tax bill, setting aside funds and evaluating payment options can prevent financial shocks when large balances are finally wiped away.
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