- The federal tax credit for income-driven repayment (IDR) student loan relief expires after December 31, 2025.
- The Department of Education will use the borrower’s significant date as the “effective” discharge date for IRS purposes.
- Some borrowers who may qualify for forgiveness now should act before the end of the year if they want to protect against a potential tax bill.
On December 31, 2025, the temporary federal tax credit for forgiven student loan debt expires. Starting in 2026, borrowers who get forgiveness through income-driven repayment (IDR) plans may again face federal and state income tax on any discharged balance.
The relief, created in 2021, was intended to give long-term borrowers a breathing space. Forgiven debt is usually taxable — meaning that the balance of forgiven debt is treated like ordinary income and added to your tax return. This could mean large tax bills — something borrowers who have struggled to pay off their student loans for 20 or 25 years likely can’t afford.
Change does no Affects Public Service Loan Forgiveness, which remains tax-deductible. But it will reshape financial planning for millions in IBR, PAYE, and ICR programs (along with those in other programs that may be subject to tax).
The date of the event is more important than the date of treatment
The crucial rule of who owes taxes and who doesn’t makes up the schedule: The date for federal tax purposes is when the borrower becomes eligible For forgiveness, not when processing cancellation.
Backlogs in servicing almost always mean that loans can take weeks or months to go from “eligible” to “fully discharged.” But for federal taxes, the moment the borrower reaches the required number of qualifying payments (usually 240 or 300) is the moment that determines the tax year.
example
- Qualifying Payment Postings No. 240 for the borrower December 15, 2025.
- Their loan servicer completes the unloading process January 20, 2026.
- For federal tax purposes, the borrower is treated as having been forgiven In 2025the last year of the abolition of tax-free IDR.
If the same milestone is reached January 2, 2026The exempt balance will fall into the first year of the renewed tax liability.
For borrowers near the finish line, a difference of a few weeks can translate into thousands of dollars in taxes.
Who is most at risk of the “tax bomb”?
There are a few groups that need special attention.
Borrowers are approaching 20 or 25 years of IDR payments
Those nearing the end of their IBR, PAYE or ICR repayment terms face the highest risk. Borrowers who started repaying in the late 1990s or early 2000s (particularly those with long periods of deferment or forbearance) may unexpectedly find themselves on the verge of forgiveness without even realizing it.
This group should confirm the number of their IDR payments as soon as possible. Some borrowers received payment modifications in recent years that shortened their remaining timeline, pushing them closer to loan forgiveness without warning.
Borrowers with high balances
Large remaining balances create the greatest tax exposure. Even modest income can face large tax bills when tens of thousands of dollars become taxable at once.
Borrowers with graduate debt, Parent PLUS loans built into IDR plans, or loans that have grown due to interest are more likely to feel the impact.
Run our tax bomb calculator to get an estimate of what you could owe.
Borrowers in states that forgive tax debts
Many states treat forgiven student debt as taxable income. After 2025, the list will grow as 20 states automatically align their tax rules with federal law — meaning that when the tax-free period expires, the same thing happens in those states. Borrowers living in these states should pay especially close attention.
Some bailed-out borrowers are stuck in legal forbearance
Millions of SAVE enrollees are currently in forbearance due to ongoing lawsuits. This period does no Relying on IDR remission or PSLF progression.
For borrowers who may have already reached or are approaching their 20- or 25-year thresholds, this pause creates risk. Borrowers who have time need to switch to IBR, ICR or PAYE before December 31 to ensure their relief is complete.
How borrowers can prepare now
There are things student loan borrowers can do now.
1. Confirm the number of your payments
Contact your loan servicer and request the total IDR-eligible payment. This is important since the IDR tracker has disappeared from the StudentAid.gov website. Servicers can take time to respond, and borrowers approaching the 20 or 25 year mark should move soon.
2. Document the date you reached eligibility
Keep screenshots, data, and written confirmation showing the date your eligible payment threshold was met. This date determines whether the exemption is tax deductible.
3. Consider switching payment plans if you’re in savings mode
Borrowers stuck in SAVE who believe they are getting closer to forgiveness should evaluate whether moving to IBR, ICR, or PAYE before December 31, 2025 will ensure they qualify.
4. Review potential tax liability
Borrowers who are likely to reach forgiveness after 2025 should run The College Investor Tax Bomb Estimator to find out:
A tax professional can help determine potential outcomes.
5. Monitor federal and state policy
Congress can extend the exemption, however No extension passed. States may also update their treatment of forgiven debt. Borrowers should remain alert for policy changes that could impact their 2026 tax bill.
What are you doing now
The end of the tax-free IDR exemption means that more complications may come from time-based student loan forgiveness. For those who have been paying off loans for decades, the next month may determine whether long-awaited forgiveness arrives without a financial sting or whether the forgiven balance creates a tax burden.
Use this time now to understand the number of payments, assess your tax liability, and make sure you know when to expect to reach your exemption phase.
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