A new analysis warned that millions of federal student loan borrowers face a significant tax liability starting this year as a temporary federal exemption on forgiven debt expired.

The report from the advocacy group Protect Borrowers, released in early October, projected that between two million and three million borrowers will receive income-driven repayment forgiveness over the next decade. The average amount canceled stands at approximately forty-nine thousand seven hundred dollars. This forgiven balance counts as taxable income under current rules.

The change stems from the expiration of Section 108(f)(5) of the tax code on December 31, 2025. That provision, enacted through the American Rescue Plan Act, had excluded most student loan discharges from federal taxable income through the end of last year. The One Big Beautiful Bill Act passed earlier in 2026 made the exclusion permanent only for discharges due to death or total and permanent disability.

Income-driven repayment forgiveness now triggers ordinary income tax treatment. Borrowers on plans such as Income-Based Repayment, Pay As You Earn, and Income-Contingent Repayment will owe taxes on the remaining balance once they reach the twenty- or twenty-five-year mark. The report modeled impacts ranging from six thousand to twelve thousand dollars in additional federal taxes and lost credits for typical households.

Low-income families face the steepest relative burden. A family of four earning forty thousand dollars could see its tax liability increase more than tenfold. Single borrowers earning forty thousand to eighty thousand dollars could owe between ten thousand and nearly twenty thousand dollars in one year. Southern states including Louisiana, Mississippi, and Arkansas are expected to experience the largest average increases.

Certain programs remain exempt from federal taxation. Public Service Loan Forgiveness and Teacher Loan Forgiveness continue to qualify for tax-free treatment. Borrowers may also qualify for insolvency exclusions or other relief on their returns.

The Internal Revenue Service will issue Form 1099-C for cancellations of six hundred dollars or more. Borrowers must report the income regardless of whether they receive the form. State tax treatment varies and could add further obligations in some jurisdictions.