Tax Breaks for Billionaires, Tax Bombs for Borrowers: The “One Big Beautiful Bill” Slams Americans Who Earn Student Debt Cancellation with Thousands of Dollars in Additional Taxes Starting 2026

This tax analysis was also published as a memo, which contains additional information on methodology, sources, and notes.

By Jennifer Zhang | November 10, 2025

Starting on January 1, 2026, student loan borrowers who earn cancellation under an Income-Driven Repayment (IDR) plan may be slammed with thousands of dollars in additional taxes. We recently released an analysis to understand just how much a typical borrower could be forced to pay. We found that a borrower who has the average amount of debt cancelled under IDR could shoulder a net loss of between $5,800 to over $10,000 in additional taxes and lost credits.

The timing could not be worse. Most Americans can barely afford rent, groceries, and childcare. Americans who earn student loan cancellation under IDR are often barely scraping by—about two-thirds of them earn less than $50,000 a year, and over two-thirds have less than $1,000 in savings. A student loan cancellation tax bomb will push thousands of these borrowers into debt to the IRS—at precisely the moment when they should be getting relief after decades of student loan payments which have earned them the right to cancellation under federal law.

Critically, it doesn’t have to be this way.

Congress has passed legislation to protect borrowers from debt relief tax bombs in the past. President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) exempted student loan debt discharged due to death and disability, and President Biden’s 2021 American Rescue Plan Act (ARPA) exempted all cancelled student loan debt from being counted as income until December 31, 2025. When passing the “One Big Beautiful Bill” Act (OBBBA), the Republican majority in Congress chose to permanently extend federal tax exemptions for borrowers only due to death and disability—leaving millions of Americans enrolled in IDR vulnerable to significant tax hikes upon earning cancellation. Simultaneously, Education Secretary McMahon attempted to restrict access to IDR plans and subsequent cancellation. Just last month, the American Federation of Teachers (AFT), represented by Protect Borrowers, secured a major victory in a lawsuit challenging these actions. As a result, borrowers who are eligible for cancellation by December 31, 2025 but do not have their cancellation processed until afterward will be protected from the impending tax bomb. However, policymakers must act to protect the millions of American families who will see their taxes skyrocket after January 2026.

How We Got Here

Under the Higher Education Act, federal student loan borrowers enrolled in a qualifying IDR plan are entitled to the cancellation of their remaining balances after making payments for 20 to 25 years. The OBBBA eliminated current IDR plans for new borrowers taking on new loans after July 1, 2026, but its newly established Repayment Assistance Plan (RAP) still grants borrowers cancellation after 30 years.

However, for decades, federal student loan servicers made widespread accounting and payment tracking errors that ultimately denied or improperly postponed cancellation for millions of borrowers. Under the Biden Administration, the U.S. Department of Education took significant administrative actions to correct these servicing errors, including a one-time IDR Account Adjustment that re-counted borrowers’ qualifying payments toward loan cancellation for all Direct loans and loans under the Federal Family Education Loan (FFEL) Program that are held in the Department’s portfolio. As a result, over 1 million borrowers had their loans cancelled through IDR as of May 2024, and more than 3.6 million borrowers are at least three years closer to achieving IDR cancellation. 

There is still time for Congress and the Trump Administration to act to protect thousands of student loan borrowers from unaffordable tax hikes come January. Otherwise, they will be slammed with unaffordable tax bills that can wipe out savings accounts and push many into debt.

Who Pays?

Currently, to be eligible for student loan cancellation under IDR, borrowers must pay between 10 to 20 percent of their discretionary income for 20 to 25 years. This constant financial pressure pushes borrowers to forgo saving for an emergency nest egg, retirement, homeownership, and having children, and even to go without food, medicine, or other necessities. 

According to a survey conducted by the Consumer Financial Protection Bureau (CFPB), roughly two-thirds of IDR loan cancellation recipients report making less than $50,000, while over two-thirds have less than $1,000 in savings. The same survey additionally found that a majority of borrowers who have had a loan cancelled were Pell Grant recipients (61.3 percent), and a significant majority are women (70.2 percent). These borrowers simply cannot afford a tax bill for thousands of dollars.

We conducted an analysis of how much more single borrowers, single parents, and married borrowers with children will be forced to pay in taxes as a result of receiving the average amount of loan cancellation under IDR ($49,321) and having it be treated as taxable income. See our memo for additional methodology and assumptions behind our calculations. Here are our findings:

• A lower-income borrower who is married, has two dependents, and earns $40,000 a year could shoulder a net loss of $10,295 in credits and additional taxes. Specifically, they would lose access to $8,534 from the Earned Income Tax Credit (EITC) and the refundable portion of the Child Tax Credit (CTC), and their tax liability would grow by $1,761 (after applying the remainder of the CTC). See Figure 1 for more projections at this income level.

• Lower-income borrowers’ effective tax rates would likely increase the most, prior to the application of remaining eligible tax credits. Borrowers who earn the median income of a bachelor’s degree holder ($80,236) would see their effective tax rates double, but a married borrower with two dependents who makes $40,000 a year would see their effective tax rate grow over nine times.

Figure 1. Tax changes for borrowers earning $40,000.

• A single-parent borrower who has two dependents and earns $50,000 a year could shoulder a net loss of $8,282 in credits and additional taxes. Specifically, they would lose access to $3,404 from the EITC and the refundable portion of the CTC, and their tax liability would grow by $4,878 (after applying the remainder of the CTC). See Figure 2 for more projections at this income level.

Figure 2. Tax changes for borrowers earning $50,000.

• A single borrower who has no dependents and earns the median salary of a bachelor’s degree holder ($80,236) could be forced to pay an additional $11,010. See Figure 3 for more projections at this income level.

Figure 3. Tax changes for borrowers earning $80,236.

• Among borrowers who earn the median salary of a bachelor’s degree holder, every additional $10,000 in cancelled debt raises their tax bill by $2,657 on average. See Figure 4 for tax projections for such borrowers who earn up to $200,000 in debt cancellation.

Figure 4. Tax increases for single borrowers earning $80,236.

Who Pays the Most?

Many of our calculations above focus on the tax implications for borrowers who receive the median amount of IDR debt cancellation—$49,321. Even though the tax burdens for these borrowers are significant (and for many, financially disastrous), borrowers who receive even higher amounts of debt cancellation (for example, $100,000 or $200,000) can see tax bills that are a majority of or greater than their annual salary.

For many of the borrowers enrolled in IDR who receive such large amounts of debt cancellation, their balances grew to this size over time due to interest capitalization. This phenomenon, also known as negative amortization, happens to over half of all student loan borrowers (55 percent). Even after decades of making payments, they owe more than they borrowed. Moreover, since IDR plans do not allow cancellation until after decades of repayment, current borrowers who receive such debt cancellation will have had 20 to 25 years to accrue interest, and may be more likely to experience negative amortization. Below are the stories of two real, anonymized student loan borrowers and the taxes they could incur if their cancelled debt is treated as income:

• Hilary is a borrower who had $42,000 in student loans at graduation and owed $178,000 by 2022 due to interest capitalization. She has worked continuously since graduation while being a single mother, including working for years at a pre-school that happened to be operated by a private for-profit company, excluding her from qualifying for Public Service Loan Forgiveness. Student debt has prevented Hilary from buying a home, supporting her family, and retiring comfortably. She made her first qualifying IDR payment in 2001 and should earn IDR cancellation in 2026. Assuming she earns the median salary of a bachelor’s degree holder, if her $178,000 balance is cancelled and treated as income, she could be forced to pay an additional $45,308 in taxes (increasing from $8,551 to $53,858). Her effective tax rate could increase over six times, from 10.66 percent to 67.12 percent.

• Joe is a borrower who finished a master’s degree in 1994 and had an initial loan balance of $55,000. After being steered into repeated forbearances and deferments, his balance ballooned to $260,000 by 2022 due to interest capitalization. Assuming he earns the median salary of a bachelor’s degree holder, if his $260,000 balance is cancelled and treated as income, he could be forced to pay an additional $73,691 in taxes (increasing from $8,551 to $82,242). His effective tax rate could increase over nine times, from 10.66 percent to 102.50 percent (more than his total annual income).

Borrowers who are in this position and finally shake off six figures of student loan debt could be pushed into five figures of tax debt.

Such borrowers will then be at risk of being forced to pay penalties and interest, and being subjected to tax refund and paycheck seizures. All of this would happen as a result of borrowers receiving debt cancellation, meaning they are no longer forced to pay a monthly bill that was oftentimes already unaffordable—and not because they have gained even a cent of additional money that deposits into a bank account. Borrowers who are turned into significant tax debtors could then be forced to drain their retirement savings, mortgage their home (if they own one), sell their possessions, take out new debt (if that is possible, given the credit impacts of having a tax lien), forgo seeing a doctor, or shoulder other disastrous financial consequences in order to pay the IRS.

The Tax Bomb Could Not Come at a Worse Time

The OBBBA slashed Medicare, food assistance, student loan assistance, and countless federal programs that millions of Americans depend upon to survive. Approximately 16 million Americans will become uninsured over the next decade, while health insurance premiums are already expected to double in 2026. About 4 million Americans, a quarter of whom are children, will likely start going hungry due to food assistance cuts. And now, student loan borrowers, looking forward to finally getting a break by earning cancellation they are entitled to under law, will experience massive tax increases that can drain their refunds and savings and even push them right back into debt.

These cuts will hit working Americans just as they are being squeezed by an accelerating cost of living crisis, rampant inflation worsened by tariffs on consumer goods, a remarkably weak job market, and alarming increases in indebtedness and utilization of short-term installment loans. Families simply cannot afford a massive tax bill next year, and foisting one upon them will only push borrowers into deeper debt, reduce consumer spending, and further harm the economy. Without legislative action, borrowers who have spent decades repaying their loans in good faith will face crushing tax bills at precisely the moment when they should be receiving relief long promised to them under law. Congress must act swiftly to protect working families, safeguard their financial well-being, and honor the commitments made to borrowers who have carried the weight of student debt for far too long.

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Jennifer Zhang is a Research Associate at Protect Borrowers. She was previously a Director’s Financial Analyst at the CFPB, where she worked with the Student Loan Ombudsman’s office, the Policy Planning & Strategy team of the Director’s front office, and the Quantitative Analytics team of the Enforcement Division.

*To dig deeper into our analysis, see our memo, which contains additional information on methodology, sources, and notes.