Student loan forgiveness delays and backlogs could lead to 'massive' tax bills for borrowers, advocate says

Damircudic | E+ | Getty ImagesRecent delays to student loan forgiveness could leave borrowers with an unexpected tax bill.Under the Trump administration, hundreds of thousands of borrowers who requested to be enrolled in a repayment plan that leads to debt cancellation are stuck in limbo amid a backlog of applications

Recent court actions and the passage by Congress of President Donald Trump's "big beautiful bill" will further complicate some people's path to debt erasure.At the same time, a law that shielded student loan forgiveness from taxation is expiring at the end of 2025

These combined events could mean that borrowers who get the relief later than anticipated may also end up owing a bill to the IRS."Borrowers could face a massive tax bill if their cancellation is delayed after January 1, 2026," said Persis Yu, deputy executive director and managing counsel at the Student Borrower tection Center.Delayed loan relief may trigger a new 'penalty'The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025

Trump's "big beautiful bill" did not extend or make permanent that broader vision.Without action from Congress, student loan borrowers who get their debt forgiven under the U.S

IDR plans cap people's monthly payments at a of their discretionary income and cancel any remaining debt after a certain period, typically 20 years or 25 years.More from Personal Finance:Trump floats tariff 'rebate' for consumetudent loan forgiveness may soon be taxed againStudent loan borrowers — how will the end of the plan impact you? Tell usThe recent delays to loan forgiveness are a result of multiple changes

Among them:The Education Department said earlier this summer that it was pausing the loan discharge component on the Income Based Repayment, or IBR, plan, while it responds to recent court orders

That freeze remains in place. "They have given no guidance as to when they may resume," said Nancy Nierman, assistant director of the Education Debt Consumer Assistance gram in New York.Loan forgiveness is also paused on other IDR plans, including the Income-Contingent Repayment, or ICR, plan, the Education Department says

Many of these borrowers are ly trying to leave a gram in which loan forgiveness is paused or unavailable.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," lawmakers, including Sen

Bernie Sanders, I-Vt., recently wrote in a letter to Education Secretary Linda McMahon

Loan forgiveness tax liability could be significantThe tax bill on student loan forgiveness can be significant.The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said higher education expert Mark Kantrowitz.For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of over $12,000, Kantrowitz estimates

Many states mirror the federal government's tax policy on student loans, meaning more states may start to levy the aid next year as well, experts say.Debt relief granted under the Public Service Loan Forgiveness gram is not subject to federal taxes, although borrowers may owe their state a bill

As of July 31, there was a 72,730-person backlog of borrowers waiting to have the Department of Education help them access their PSLF loan forgiveness.What to do the possible tax billBorrowers who expect they'll become eligible for student loan forgiveness in 2025 "should all payment records with their servicers," Nierman said."If necessary, they can use this information to ve they were entitled to forgiveness during a year in which it is not subject to tax," she said.For borrowers who anticipate the relief after Jan. 1, 2026, Nierman recommends starting to plan for the tax bill by salting away some money when you can in preparation.The headquarters of the Department of Education on March 12, 2025 in Washington, DC.Win McNamee | Getty ImagesBorrowers often don't have to pay the entire tax bill in one sum, she added."They can request a plan through the IRS to spread the payments over a longer period of time," Nierman said

Meanwhile, if your liabilities exceed your assets or you're dealing with a serious financial hardship, you may be able to reduce or eliminate the bill altogether, she said.