Analysis Shows Borrowers in the South Will See the Largest Tax Increases
October 7, 2026 | WASHINGTON, D.C. — A new report published by Protect Borrowers found that federal student loan borrowers could be forced to pay a massive “tax bomb” of as much as nearly $12,000 after earning debt relief under an Income-Driven Repayment (IDR) plan, starting in the 2026 tax year. According to the analysis, this “tax bomb” could hit between 2 to 3 million Americans over the next 10 years, most of whom earn less than $60,000 a year and have almost no savings. As a result of the impending tax bomb, families could see tax bills double or even triple and single borrowers could see 1 out of every 4 dollars earned go toward a higher tax bill.
The report comes after Congress failed to extend critical tax protections for student loan borrowers that expired on December 31, 2025. Starting in the 2026 tax year and amidst a worsening affordability crisis, borrowers who earn IDR cancellation will have their cancelled debt treated as taxable income. The report sheds light on the states where this “tax bomb” would be most severe for borrowers. According to the report, borrowers in the South will see the largest tax increases, as will lower-income Americans, families, and single parents. Residents in the following states could see the steepest tax increases:
Figure 1. Top 10 states by projected tax increases.
| Rank | State | Tax Outcome: Cancelled Debt Not Taxed | Tax Outcome: Cancelled Debt Taxed | Additional Tax Costs from Cancelled Debt | Average New Income Tax Liability as Share of Previous (%)* |
|---|---|---|---|---|---|
| 1 | Louisiana | Credit of $2,777 | Owes $4,892 | + $7,668 | More than triple (349.5%) |
| 2 | Mississippi | Credit of $3,383 | Owes $3,919 | + $7,303 | More than triple (340.6%) |
| 3 | Arkansas | Credit of $2,406 | Owes $4,424 | + $6,830 | More than triple (316%) |
| 4 | West Virginia | Credit of $2,838 | Owes $3,045 | + $5,883 | Nearly triple (282.5%) |
| 5 | Oklahoma | Credit of $1,122 | Owes $4,762 | + $5,885 | More than double (279.5%) |
| 6 | New Mexico | Credit of $922 | Owes $5,010 | + $5,932 | More than double (270.6%) |
| 7 | Alabama | Credit of $1,061 | Owes $4,359 | + $5,420 | More than double (262.3%) |
| 8 | Kentucky | Credit of $1,606 | Owes $3,646 | + $5,252 | More than double (261%) |
| 9 | South Carolina | Credit of $378 | Owes $6,005 | + $6,383 | More than double (258.7%) |
| 10 | Missouri | Credit of $469 | Owes $5,737 | + $6,206 | More than double (257.9%) |
“This tax bomb will force millions of working-class families, who have been diligently making payments for two decades or more, to trade their student loan debt for debt to the IRS,” said Jennifer Zhang, Policy, Research, and Data Analyst at Protect Borrowers and author of the report. “Congress designed the Income-Driven Repayment programs with the promise of debt relief so that borrowers are not forced to carry the weight of their student loans for their entire lives. But that promise means little if Americans who finally reach the finish line face a massive tax bill that keeps them trapped in debt. Congress can and must take action to defuse the tax bomb and make cancellation a genuine reprieve for working families, not another financial nightmare.”
The report, Fleeced at the Finish Line: The Tax Bomb Coming for IDR Borrowers, is available at: https://protectborrowers.org/resource/fleeced-at-the-finish-line-the-tax-bomb-coming-for-idr-borrowers/.
The report finds that:
- Many families will see their tax bills double or even triple. Tax increases for borrowers who earn cancellation range from an additional $6,000 to nearly $12,000 depending on income, tax status, and family size. Lower-income borrowers and borrowers with children will see their taxes increase the most and may lose eligibility for the Earned Income Tax Credit.
- Single borrowers without children who earn cancellation could see about 1 out of every 4 dollars of their salary go toward a higher tax bill. After accounting for Social Security, Medicare, and state income taxes, these borrowers could see their take-home income cut nearly in half.
- Borrowers in the South will see the largest increases in their taxes. Specifically, the states where borrowers’ taxes will increase the most are Louisiana, Mississippi, Arkansas, West Virginia, Oklahoma, New Mexico, Alabama, Kentucky, South Carolina, and Missouri. In these states, a married borrower with two children will see their tax bill double and even triple on average, and pay over $5,000 in additional taxes.
- Between 2 to 3 million borrowers will likely be subject to the cancellation tax bomb over the next 10 years. This is roughly equal to the population of Kansas, Mississippi, New Mexico, Idaho, or Nebraska. On top of that, nearly 13 million Americans, or almost half of all federal student loan borrowers in repayment, are enrolled in IDR plans and making progress toward potential cancellation.
- The tax bomb will affect Americans who can least afford it. Borrowers who qualify for cancellation must make payments for 20 to 25 years on an IDR plan, and will not be able to afford these tax increases. About two-thirds of Americans who earned cancellation through IDR in 2022 made less than $50,000 a year. Half of these Americans have no bank account savings, and over 80 percent have less than $5,000 saved.
The report provides a single recommendation to both Congress and state legislatures: pass legislation to end taxation of cancelled student loan debt. The new report uses 2026 tax guidelines and data from the U.S. Department of Education, and builds upon a preliminary analysis which calculated tax bomb impacts using information available in November 2025.
Further Reading
Read the report: Fleeced at the Finish Line: The Tax Bomb Coming for IDR Borrowers
In Debt Substack post on the tax bomb: Trump’s One Big Beautiful Bill Left A “Tax Bomb” for Families Who Earn Student Debt Relief. Congress Can Still Fix This.
Blog post with preliminary calculations of tax bomb impacts: “Tax Breaks for Billionaires, Tax Bombs for Borrowers”
Memo with preliminary calculations of tax bomb impacts: Memo: How the “One Big Beautiful Bill Act” Will Raise Taxes for Thousands of Student Loan Borrowers
Press release announcing agreement in lawsuit to protect IDR enrollees and deliver student debt cancellation: Following Lawsuit by AFT, Trump Administration Agrees to Deliver Student Debt Relief and Protect Borrowers from Tax Liability Due to Red Tape and Delays
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About Protect Borrowers
Protect Borrowers (formerly Student Borrower Protection Center) is a nonprofit organization led by a team of experts, lawyers, and advocates fighting to build an economy where debt doesn’t limit opportunity. We investigate financial abuses, take predatory companies to court, and push for policies to protect working people from debt traps. We aim to deliver immediate relief to families while building power, driving systemic change, and fighting for racial and economic justice.
Learn more at protectborrowers.org or follow us on social @BorrowerJustice.