Student loan borrowers entitled to debt forgiveness but stalled by Trump administration delays may soon face what the American Federation of Teachers (AFT) is calling an “enormous tax liability.”
The union, representing around 1.8 million members, launched a legal challenge against the U.S. Department of Education earlier this year and is seeking class action status.
The AFT alleges that Trump officials are blocking access to forgiveness programs, including income-driven repayment (IDR) plans, which link monthly payments to income and allow for debt cancellation after a set period. Court filings warn that any borrower currently eligible for cancellation but whose relief is withheld could see the cancellation taxed as income if it is not processed before January 1, 2026.
This looming issue stems from the expiration of a temporary provision in the American Rescue Plan Act of 2021, which made student loan forgiveness tax-free at the federal level through the end of 2025. Without new action from Congress, forgiveness through IDR plans will once again be treated as taxable income starting in 2026. President Donald Trump’s administration did not move to extend this protection. While federal tax liability will return, some states may also impose their own taxes on forgiven balances depending on local laws.
The delays in processing forgiveness have compounded the problem. Court records show that as of July 31, over 1.3 million borrowers are waiting in a backlog of IDR applications, while 72,730 borrowers are awaiting decisions on their Public Service Loan Forgiveness (PSLF) status. PSLF provides cancellation for public servants and nonprofit workers after ten years of qualifying payments, and its relief is not taxed federally, though states may still levy charges. Lawmakers, including Sen. Bernie Sanders, have urged the Department of Education to act swiftly, warning that eligible borrowers could face massive tax burdens on relief they should have already received.
The potential tax bills are significant. According to higher education expert Mark Kantrowitz, the average balance for borrowers in IDR programs is around $57,000. For those in the 22% tax bracket, forgiveness could generate a $12,000 federal tax bill. Even those in the 12% bracket would owe about $7,000. In addition, more states may begin taxing forgiven loans in line with federal policy.
Experts suggest that borrowers who expect to qualify for forgiveness before the tax-free window closes in 2025 should carefully save all records of payments and communication with servicers to protect themselves if disputes arise. Those anticipating relief after January 1, 2026, are advised to start planning for the tax bill now, setting aside money when possible. If a lump-sum payment is unmanageable, the IRS offers installment plans to spread costs over time. Borrowers facing financial hardship may also apply for reductions or even full relief from tax liabilities.
In short, while student loan forgiveness offered hope for millions, delays under the Trump administration and the expiring tax shield could transform that relief into an expensive burden unless urgent action is taken. Borrowers are being urged to prepare, document their cases, and explore repayment options to avoid being caught off guard by the looming tax bills.
Leo Cruz brings sharp insights into the world of politics, offering balanced reporting and analysis on the latest policies, elections, and global political events. With years of experience covering campaigns and interviewing world leaders, Leo ensures readers are always informed and engaged.
