Your IDR forgiveness gets taxed now. Here's what you can do.

This one’s for you if you’re on IBR, PAYE, ICR or RAP and counting down to forgiveness after 20, 25 or 30 years.

If you’re going for PSLF, it doesn’t touch you. Same if you’re getting a disability or death discharge. You can skip this one.

Forgiveness under an income-driven plan counts as income on your federal taxes again, starting with forgiveness earned in 2026. A report out yesterday puts the typical extra bill at $6,000 to $12,000.

Congress can still fix it, and people are pushing. It hasn’t happened yet.

If your forgiveness is years away, you don’t need to do anything this week except know this. If it’s coming in the next year or two, start planning now, not next April.

And if you hit your last qualifying payment in 2025, you’re probably fine. More on that below.

What happened

The tax break that covered student loan forgiveness ran out on December 31, 2025. The law Congress passed last summer kept it permanently for death and disability discharges, and only those.

So forgiveness you earn under an income-driven plan in 2026 or later is ordinary income in the year it’s forgiven. PSLF was never part of this and stays tax-free. Teacher Loan Forgiveness stays tax-free too.

What the report found

Protect Borrowers, the nonprofit that used to be called the Student Borrower Protection Center, ran the numbers in Fleeced at the Finish Line (PDF).

They estimate 1.9 to 3.2 million people will reach income-driven forgiveness between 2026 and 2036. The average amount forgiven is $49,697. Most people who earn it made under $50,000 a year in 2022.

Here’s what that does to a tax return. A married couple with two kids making $60,000 normally gets $3,102 back. Count the forgiveness as income and they owe $4,104 instead, a $7,206 swing.

A family of four at $40,000 goes from $8,854 back to owing $1,704. A single person with no kids at $40,000 owes $10,525 instead of $2,320.

What bothers me is who this lands on. The lower your income, the worse it gets, because the forgiveness knocks you out of the Earned Income Tax Credit and the refundable part of the child credit. The people who did exactly what the program asked, on incomes low enough that the payment was small, get the biggest bill.

Those numbers are federal income tax only. They don’t count state tax, and they assume you can’t use the insolvency rule I explain below.

The South gets hit hardest: Louisiana, Mississippi, Arkansas, West Virginia, Oklahoma and New Mexico top the list for married parents. Missouri, where my office is, is tenth. By headcount it’s Texas (up to about 275,000 people), then California, Florida, New York and Ohio.

Who’s trying to fix it

Protect Borrowers has one ask. Congress should permanently exempt forgiveness under the income-driven plans and RAP in the next budget reconciliation bill, and states should stop taxing it too. In their post yesterday they say Congress still has time before April 2027, when people file their 2026 returns.

Last November, nine senators led by Elizabeth Warren, including Bernie Sanders, wrote Treasury and the IRS (PDF). They asked the IRS to use the authority it already has to treat this forgiveness as non-taxable. They pointed out that the IRS did something similar in 2020 for closed-school and borrower defense discharges. I couldn’t find any public answer from Treasury.

The fix has also been written down. Section 41005 of H.R. 6900, the American Affordability Act, would make student loan forgiveness tax-free for anything forgiven after 2025. It’s one piece of a very large tax bill from House Democrats, and it’s been sitting in committee since December. I wouldn’t plan around it.

None of this has passed. I’d plan as if it won’t, and be happy if I’m wrong.

What I’d do now

Find your date. The date you made your last qualifying payment (the 240th or the 300th) decides which year you’re in, not the date your servicer finally processes it. That comes from the settlement in the AFT lawsuit. If you hit it in 2025 and the forgiveness email shows up in 2026, you’re still inside the tax-free window. Screenshot your payment count and keep it.

If your date is 2026 or later, look at your balance. That number is roughly what gets added to your income that year. If you can set something aside, start now.

Know the insolvency rule. If you owe more than everything you own is worth right before the forgiveness, the forgiven amount isn’t taxed, up to the size of that gap. It’s claimed on IRS Form 982. It’s real, and if the gap is big enough it can wipe out the tax entirely, but it takes work. You have to value everything you own, and you’ll probably want a tax preparer who has done one before.

Think about your plan with the balance in mind. If you’re comparing plans, the balance you’ll be forgiven is part of the cost now. The plan that keeps your balance from growing also keeps the tax bill down, and RAP’s interest waiver and $50 principal match do that, but only when payments are on time. RAP also takes 30 years and isn’t cheaper at every income. Don’t switch plans because of this email. Run both.

Check your state separately. Everything above is federal. Your state may tax forgiveness on its own, even if Congress fixes the federal side.

This isn’t advice about your own return. Talk to whoever does your taxes before the year your forgiveness lands, not after.

I wrote a longer piece on IBR forgiveness and taxes if you want the details on the effective date and state rules.

— Stanley

P.S. This weekend is a pretty long one for me, but a fun road trip weekend, actually.

Friday I’m going to an LFD cigars event. We’ll get hand-rolled cigars and conversation with Tony Gomez of La Flor Dominicana.

Saturday morning a friend and I are driving up to New York City and then right back down. We’re both picking up watches that we plan to hand down to our sons, as we get older and as they do.

I’ve been thinking a lot about what gets handed down. When I was growing up, it was the china in the buffet cabinet, the KitchenAid mixer, the recipes.

We live in a more and more disposable society, and I realized very few things are going to get handed down anymore. I didn’t like the way that felt.

I think about the work I do, and we get to have a real impact, but it isn’t something I can hand down. Sure, I could hand down a law firm if my son wanted to come work there.

But I don’t want to pick his career for him. And almost everything I do lives on a screen. It’s rare that I touch anything physical.

So I had this whole conversation with myself about what physical things we can hand down that will outlive us all, so the memories stay. Maybe that’s because I’m 46 and thinking more and more about legacy.

Legacy can be a bit of a myth, and it’s easy to focus on it too much. I think what I’m saying is I want the people around me to know that I thought about them, I considered them, and I keep thinking about them well after I’m gone.

On Sunday, after I get back from New York, I’m driving down to Hampton Roads, Virginia, for my niece’s daughter’s first birthday. She and her wife went through a long battle to be able to have a kid.

Seeing them with this wonderful, beautiful daughter, and what that’s meant for them and their family, is a blessing. I can’t wait to celebrate.

It’s also the first time Giancarlo gets to meet his cousin. They live in Chicago, so we haven’t been able to catch up with them.

→ Get these in your inbox