Federal Student Loan Changes in 2026: Wage Garnishment Returns and Loan Forgiveness Becomes Taxable

Millions of Americans with federal student loans are preparing for major changes to repayment rules beginning in January 2026, as the federal government resumes wage garnishment for borrowers in default and reinstates taxation on certain types of student loan forgiveness.

According to a report by the Education Data Initiative, approximately 42.5 million people in the United States owe federal student loans, with total debt nearing $1.7 trillion, as reported by Newsweek.

Wage Garnishment to Resume for Defaulted Student Loan Borrowers

The U.S. Department of Education announced that it will begin resuming wage garnishment for borrowers who are in default starting in early January, ending a years-long pause that began during the COVID-19 pandemic under the Biden administration.

Enforcement actions are expected to begin during the first week of January, with around 1,000 borrowers initially receiving formal notices that a portion of their wages may be garnished. These notices are expected to expand to larger numbers in the following months.

A borrower is considered in default after approximately 270 days without payment, a status that grants the federal government broader authority to collect the debt, including demanding immediate repayment of the full balance.

Federal law requires borrowers to be notified at least 30 days before wage garnishment begins. Borrowers are also entitled to options such as requesting a hearing, negotiating a settlement, or entering an alternative repayment arrangement. The government may garnish up to 15% of disposable income after taxes.

Millions of Borrowers Face Renewed Collection Pressure and New Tax Burdens

Official estimates indicate that more than 5 million borrowers have not made a single payment in over a year, while an additional 4 million borrowers were already seriously delinquent before collections resumed in May 2025.

At the same time, temporary tax exemptions on forgiven student loans—introduced under the American Rescue Plan of 2021—are set to expire at the end of 2025.

Under the “One Big Beautiful Bill”, signed by President Donald Trump in July, the tax exemption was not extended. As a result, any student loan forgiveness obtained through income-driven repayment plans will be treated as taxable income starting January 1, 2026.

However, some programs will remain exempt from taxation, including the Public Service Loan Forgiveness (PSLF) program and certain other limited relief initiatives, providing partial protection for specific categories of borrowers.