Student-loan forgiveness could come with a big tax bill in 2026. Borrowers who qualify to have their student debt forgiven may have to pay federal taxes on the amount that is canceled. A new analysis estimates that the extra cost could be as high as $12,000. The warning comes from a new report by Protect Borrowers. The student-loan advocacy group released the report Wednesday, showing how the end of a federal tax break could affect borrowers who receive debt relief.

Protect Borrowers called the potential cost a “tax bomb”, according to Business Insider. Student loan tax in 2026The tax issue comes after a temporary rule expired. A provision created under former President Joe Biden's American Rescue Plan made forgiven student debt exempt from federal income taxes. That provision expired at the end of 2025, meaning forgiven debt can now create a federal tax bill for borrowers.

One example shows how large the bill could be. Protect Borrowers estimated that a married couple with two children earning $60,000 a year could face about $7,200 in additional federal taxes and lost tax credits if around $50,000 in student debt were forgiven. Protect Borrowers provided the estimate in its report, according to Business Insider. The possible extra cost varies by borrower. Across the different situations studied by Protect Borrowers, the additional cost from taxes and lost credits ranged from about $6,000 to $12,000.

Why are Dow, S&P 500 and Nasdaq falling as Treasury yields hit 24-year high? The analysis looked specifically at 2026 tax rules. Protect Borrowers based its calculations on federal tax rules for 2026 and used the average amount of student debt canceled under an income-driven repayment, or IDR, plan. Income-driven repaymentIDR plans can forgive remaining student debt after many years.

Under these income-driven repayment programs, borrowers can have their remaining student debt forgiven after 20 or 25 years, depending on when they first took out their loans. That means some borrowers who finally reach the end of their repayment period could now face a new financial problem. Instead of simply receiving debt relief, they would have to report the forgiven amount as taxable income and potentially owe thousands of dollars in federal taxes. Student debt forgivenessProtect Borrowers said this could undermine the purpose of IDR programs.

Jennifer Zhang, a policy analyst at Protect Borrowers, said the government created IDR programs with the promise that borrowers could eventually receive debt relief instead of carrying student loans for their entire lives, according to Business Insider. Zhang warned that a large tax bill could leave borrowers struggling even after their loans are forgiven. She argued that the promise of debt relief means little if borrowers who reach the end of the process are hit with a large tax bill that keeps them in financial trouble.

Southern states hit harderBorrowers in some Southern states could be hit harder. The report said people in states including Louisiana, Mississippi and Arkansas are expected to see some of the biggest tax increases. The reason is that borrowers in those states generally have larger student-loan balances and lower incomes. According to Protect Borrowers' analysis, those two factors can make the tax impact of forgiven debt more significant.

Webull China ties: Why US lawmakers say the trading app poses a national security riskBorrowers worry about taxesSome borrowers are already worried about what the new rules mean for them. People previously interviewed by Business Insider said they were concerned that they could reach the point of student-loan forgiveness only to face a large tax bill afterward.

One borrower, Misty Knapp, said she is close to receiving debt relief but is worried about the tax cost. Knapp said she was only six payments away from qualifying for debt relief, but she does not know how she would afford the taxes on the amount that is forgiven, according to Business Insider. Lawmakers want tax break backDemocratic lawmakers have also called for the tax-free treatment to return. A group of Democratic lawmakers has pushed Congress and the Treasury Department to restore the rule that allowed forgiven student debt to remain free from federal income taxes.

Lawmakers raised the issue with the Treasury Department last year. In a letter, the lawmakers cited an earlier Protect Borrowers analysis that found borrowers receiving debt relief through an IDR plan could face losses of roughly $5,800 to $10,000 because of the tax impact.IDR tax problemThe lawmakers said the tax could defeat the purpose of IDR. They argued that imposing large tax bills on borrowers who receive IDR debt relief could undermine the program's main goal and break the government's promise to borrowers.

The lawmakers made the argument in their letter to the Treasury Department. The key issue for borrowers in 2026 is that “forgiven” does not necessarily mean “free.”Under the current federal tax rules described in the report, some borrowers could see their student debt wiped out but then face thousands of dollars in additional taxes or lost tax credits, according to Business Insider. For borrowers nearing forgiveness, the potential tax bill could therefore become an important part of their financial planning.

Protect Borrowers' estimates show that depending on income, family size and the amount of debt forgiven, the extra cost could reach $12,000. Borrowers expecting student-loan forgiveness in 2026 may need to prepare for a separate federal tax hit. Protect Borrowers estimates that the combined impact of additional taxes and lost credits could range from about $6,000 to $12,000 in the scenarios it studied.