Trump’s One Big Beautiful Bill Left A “Tax Bomb” for Families Who Earn Student Debt Relief. Congress Can Still Fix This.

Over the Next Decade, 2 to 3 Million Americans Who Earn Student Debt Cancellation After Making Payments for 20+ Years Could Be Hit With a Massive Tax Bill

By Jennifer Zhang & Gracie Bouwer | October 7, 2026

Last year, Republicans in Congress passed, and President Trump signed into law, the One Big Beautiful Bill Act (OBBBA), which drastically cut taxes for the wealthiest Americans and largest corporations while slashing critical social safety net programs. Since then, millions of Americans have lost their healthcare and food assistance, families have seen their health insurance premiums skyrocket, and millions of students have had a college education pushed further out of reach. While policymakers used the OBBBA to extend many tax breaks for the wealthiest Americans that were set to expire at the end of 2025, they intentionally left out a tax break that would have shielded many working families who have been paying off their student loans for over 20 years from being hit with a massive tax bill. 

How Did We Get Here?

For decades, under the Higher Education Act, student loan borrowers enrolled in an Income-Driven Repayment (IDR) plan have held the right to have their remaining federal student loan balance cancelled after making payments for 20 to 25 years. The promise of IDR cancellation has always been a key part of the federal student loan safety net, aimed at ensuring that borrowers do not have to repay their loans for the rest of their lives. While the OBBBA replaced many IDR plans for new borrowers with a new Repayment Assistance Plan (RAP)—which will raise costs by thousands of dollars annually, force borrowers to pay their loans for 30 years, and put borrowers through much greater financial hardship than previous repayment plans—the law still ensures that borrowers have a right to cancellation. 

However, starting this year, that promise is going to come with a major catch—specifically, a “tax bomb” that could double and even triple families’ tax bills this year alone. Protect Borrowers estimates that the tax bomb will likely hit 2 to 3 million Americans over the next decade.

How Bad Could It Be?

Who will be hit by the tax bomb? The Consumer Financial Protection Bureau (CFPB) found that among Americans who earn cancellation under IDR:

• Two-thirds made less than $50,000 in 2022 (or about $60,000 today, generously assuming that their wages rose with inflation);

• Half have no savings in their bank account (or any other non-retirement account);

• About 80 percent have less than $5,000 in savings; and

• Over a third have no retirement savings.

These borrowers are likely unable to afford an emergency or financial shock of any kind, much less a five-figure tax bill. Lower-income borrowers, single parents, and families could see the largest increases in their federal tax bills after earning cancellation—as will borrowers in the South. We calculated that a family who receives the average national IDR cancellation amount ($49,697), making just $40,000 a year and supporting two kids, would be on the hook to pay almost $11,000 in additional taxes and lost credits. Their tax liability would grow to 1,152 percent of what it is in a normal tax year. 

At the exact moment when Americans should be getting a chance to feel relief after making payments for decades, they will be forced to trade their student loan debt for debt to the IRS.

Figure 2. Tax bomb impact projections for borrowers earning $40,000.

For our methodology and additional projections by income, click here.

A single parent with two kids, earning $40,000, would pay nearly $10,000 in additional taxes and lost credits, and see their tax liability grow to over five times what it usually is. A single borrower with no kids would pay over $8,000 in additional taxes and lost credits, and see their tax liability more than quadruple. The effective tax rate for a single borrower would be over 26 percent, meaning that more than 1 out of every 4 dollars they earn will go straight to federal taxes as a result of the tax bomb. After accounting for Social Security, Medicare, and state income taxes, that borrower could see their income effectively cut in half (to just north of $20,000), and be pushed alarmingly closer to the federal poverty level.

It doesn’t get a lot better at higher income levels. Americans who earn student loan cancellation under IDR could pay tax increases ranging from about $6,000 to $12,000 on average, and see their tax liabilities double or triple, depending on their income and household size. 

Borrowers with larger balances could face especially catastrophic tax bills. Many borrowers on IDR see their debts grow over time despite making payments. We spoke to one borrower who took out $125,000 in loans by 1998, which due to interest ballooned to $450,000 by the time she earned cancellation this year, despite her making payments that now exceed the original loan amount. The borrower expects to have an income of up to $80,000 at most. If her cancelled debt is treated as income and the borrower files as married with no dependents, she could have a tax liability of $112,000 before penalties and interest, which is 140 percent of her total income for the year and almost the same as her original student loan balance. The borrower noted, “I’m close to taking Social Security. I will never be able to pay off this tax bill in my lifetime.”

For more projections, take a look at our report, Fleeced at the Finish Line.

Borrowers in Southern States Will Pay the Most

For all 50 states, we modeled the tax impact for a borrower who earns the median household income of the state and receives the average IDR cancellation amount for the state. We found that borrowers in the South will generally be hit with the largest tax increases when they earn IDR cancellation.

The top 10 states where borrowers will pay the most are Louisiana, Mississippi, Arkansas, West Virginia, Oklahoma, New Mexico, Alabama, Kentucky, South Carolina, and Missouri. Across the board, the average married borrower raising two kids in each of these states would see their tax liability more than double or even triple, and they could pay nearly $8,000 in additional taxes and lost credits.

Figure 6. Top 10 states by impacts of cancelled debt taxation, for married borrowers with two dependents earning the state median income and average IDR cancellation.

Here’s a look at where tax liabilities will increase the most, as a percentage of what borrowers usually pay, for all 50 states. The states where taxes will more than triple on average are all in the South.

It is Not Too Late for Congress To Fix This

Policymakers have taken action before to end taxation of cancelled student loan debt for vulnerable Americans. In the Tax Cuts and Jobs Act of 2017, Congress exempted loans cancelled due to death or permanent disability from federal taxation, for a period stretching from 2018 to the end of 2025. In the American Rescue Plan Act of 2021, Congress expanded this tax exemption to include all cancelled federal student debt, including loans cancelled under IDR plans, until the end of 2025. The OBBBA allowed the broad exemption to expire, but did permanently extend the tax exemption for loans cancelled due to death or permanent disability. 

Congress still has time to act before April 2027, when millions of Americans will be filing their taxes for this year. Americans are facing a rampant affordability crisis, and sinking into more debt than ever as they struggle with the rising costs of groceries, housing, healthcare, childcare, and more. The last thing working families can afford, and certainly what could push them straight into financial catastrophe, is a five-figure tax bill. It is critical that Congress passes legislation to end taxation of student loans cancelled under IDR, and that state legislatures do the same.

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Jennifer Zhang is a Policy, Research, and Data Analyst 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. 

Gracie Bouwer is Chief of Staff for Families Over Billionaires. She was previously Director of External Affairs for the Senate Banking, Housing, and Urban Affairs Committee under Ranking Member Elizabeth Warren. Before that, she served as Deputy Assistant Director of the CFPB’s Office of Policy Planning & Strategy and as advisor to Director Rohit Chopra.

This blog was also published on In Debt, a Protect Borrowers Substack.