U.S. Senators Warn of 2026 “Tax Bomb” as Student Loan Forgiveness Exemption Nears Expiration

A number of U.S. senators have issued a broad warning to student loan borrowers as the tax exemption on forgiven debt approaches its expiration at the end of 2025. The change could result in federal taxes of up to $10,000 being imposed on beneficiaries of loan-forgiveness programs starting in 2026, according to Newsweek.

Since the passage of the 2021 Rescue Plan, borrowers whose debts were forgiven have been exempt from paying federal taxes on the canceled amounts. But this exemption is set to end on December 31 of next year. This means that millions of Americans who have been waiting for their student loans to be forgiven under income-driven repayment (IDR) programs could suddenly face huge tax bills the moment they receive the long-awaited relief.

The warnings came in a letter signed by nine U.S. senators, including Democrat Elizabeth Warren and Independent Bernie Sanders, addressed to Treasury Secretary Scott Bessent and the IRS. The letter stated that taxing forgiven debt would “undermine the core purpose of income-driven repayment programs and deprive millions of Americans of the safety net they were promised.” Lawmakers called for extending the exemption or creating a permanent regulatory solution before the legal deadline expires.

According to Protect Borrowers, an advocacy group, a person who has about $49,000 of debt forgiven may face a tax bill between $5,800 and $10,000, while borrowers with larger amounts forgiven could owe over $11,000. Financial expert Michael Ryan said that “turning forgiveness into a massive tax liability empties the concept of fairness of its meaning,” adding that “Congress has not acted to extend the exemption—and that is the heart of the problem.”

The situation is further complicated by the implementation of Trump’s new law, known as the One Big Beautiful Bill Act, passed in July, which introduces a new repayment program called the Repayment Assistance Plan (RAP). The law includes tougher rules than previous programs, including higher monthly payments, no inflation adjustments, and a mandatory minimum payment even for borrowers without steady income. It also requires new borrowers to enroll in the plan starting July 2026.

Analysts believe the changes could push millions of low- and middle-income borrowers into a severe financial crisis, especially as the U.S. Department of Education is currently frozen from processing loan forgiveness due to court orders. Estimates indicate that around three million Americans are enrolled in IDR programs, but the new adjustments may force increasing numbers to switch to less flexible and more expensive plans.

Economists warn that turning forgiven loans into taxable income will transform “the long-awaited relief into a heavy burden.” Michael Ryan said: “We told borrowers that if they paid what they could for 20 years, the remaining balance would be forgiven. But we didn’t tell them that forgiveness could turn into a tax bill they can’t afford.”

Michelle Zambini of the Institute for Higher Education Access said that “forcing borrowers to pay massive taxes after decades of repayment is illogical, especially since most of them are low-income individuals who couldn’t afford their loans in the first place.”

The debate in Washington is expected to intensify in the coming months over whether Congress will intervene to extend the tax exemption. Observers warn that ignoring the issue could lead to what they call a “tax bomb” threatening millions of Americans at the start of 2026.