What is the "tax bomb" that lawmakers are warning about?

Lawmakers are warning that student loan borrowers could face thousands of dollars in new taxes in 2026 when a tax exemption on student loan forgiveness expires.

What legal authorities are lawmakers asking the Biden administration to use?

The lawmakers have outlined several legal authorities they believe the administration could use to prevent these new tax bills, including a general welfare exclusion.

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Lawmakers Warn of Looming "Tax Bomb" on Student Loan Forgiveness

Q: How much could borrowers owe in taxes?

According to an analysis, borrowers who receive the average amount of debt canceled under income-driven repayment plans could face losses between $5,800 and $10,000.

10 Nov

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Summary

Student loan forgiveness set to become taxable in 2026
Borrowers could face $5,800 to $10,000 in new taxes
Lawmakers call for administration to use legal authority to prevent taxes

Lawmakers Warn of Looming "Tax Bomb" on Student Loan Forgiveness

As of November 10, 2025, lawmakers are sounding the alarm on a potential "tax bomb" that could hit student loan borrowers in the near future. In a letter to the Treasury Secretary, a group of Democratic senators, led by Elizabeth Warren, are calling on the administration to use its legal authority to prevent this looming tax burden.

The issue stems from a 2021 provision in the American Rescue Plan that made student loan forgiveness tax-free. However, this provision is set to expire in January 2026. This means that borrowers who complete their payments on income-driven repayment plans in 2026 could face thousands of dollars in new taxes.

An analysis by the advocacy group Protect Borrowers estimates that borrowers who receive the average amount of debt canceled under income-driven repayment plans could face losses between $5,800 and $10,000. The lawmakers warn that this would be a "financial disaster for working-class Americans" and undermine the very purpose of the income-driven repayment program.