According to a report published in October 2026 by the advocacy organization Protect Borrowers, between 1.9 million and 3.2 million borrowers could qualify for debt cancellation over the next decade. Many could see their federal income tax liabilities double or triple, raising concerns about whether long-awaited financial relief will actually improve their circumstances.
Why Student Loan Forgiveness Could Trigger Thousands in Additional Taxes
The change stems from the expiration of a provision in the American Rescue Plan Act of 2021, signed by former President Joe Biden. That legislation temporarily excluded forgiven student loan balances from federal taxable income through December 31, 2025.
Beginning with the 2026 tax year, borrowers receiving cancellation through income-driven repayment (IDR) plans may once again have their forgiven balances counted as taxable income. These repayment programs generally allow eligible borrowers to have their remaining balances canceled after 20 or 25 years of qualifying payments. A newer repayment program provides cancellation after 30 years.
According to Protect Borrowers, the average balance canceled under IDR is $49,697. For borrowers earning relatively modest salaries, adding that amount to their taxable income can substantially increase their tax obligations.
The report illustrates the consequences through several household scenarios based on 2026 federal tax rules. A married couple with two children earning $60,000 annually would ordinarily receive a net federal tax credit of $3,102. If approximately $50,000 in student debt were canceled and treated as income, the household would instead owe $4,104, representing a $7,206 financial difference.
The impact could be greater for lower-income households. A similar family earning $40,000 could lose $8,854 in expected tax credits and owe $1,704, producing a combined financial impact of $10,558. These calculations reflect both additional income taxes and the loss of tax benefits, including the Earned Income Tax Credit.
Southern States Face Particularly Steep Increases As Lawmakers Consider Relief
The financial consequences would not be distributed evenly across the country. According to Protect Borrowers, households in Louisiana, Mississippi, and Arkansas face some of the largest projected increases because borrowers in those states generally have lower incomes and, in several cases, higher outstanding loan balances.
For married borrowers with two dependents, the report estimates additional federal tax costs of $7,668 in Louisiana, $7,303 in Mississippi, and $6,830 in Arkansas. Meanwhile, Texas and California have the largest projected numbers of affected borrowers, with upper-bound estimates of 275,200 and 270,800, respectively, between 2026 and 2036.
The potential burden extends beyond taxes themselves. According to the report, more than 80% of borrowers who previously received IDR cancellation had less than $5,000 in savings.
Some borrowers may qualify for an insolvency exclusion, which can reduce the amount of canceled debt subject to taxation. Other forgiveness programs, including Public Service Loan Forgiveness, remain federally tax-exempt. Democratic lawmakers have urged the federal government to restore broader tax protections for borrowers receiving IDR forgiveness.
Protect Borrowers is calling for federal and state legislation to eliminate taxation of qualifying canceled student debt. Without such changes, borrowers who complete decades of repayment could find themselves exchanging student loan obligations for a new debt owed to the Internal Revenue Service.
