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.

The lawmakers have outlined several legal authorities they believe the administration could use to prevent these new tax bills on student debt relief. One option they suggest is a general welfare exclusion, arguing that income-driven repayment plans, by nature, demonstrate a borrower's financial need, and the loan forgiveness would promote their overall well-being.