Republican House lawmakers on Friday unveiled legislation that would narrowly extend student loan forgiveness tax relief for borrowers and their families due to death and disability. But loan forgiveness for most borrowers under other programs would revert to being taxable again next year, as lawmakers allows key provisions of the tax code to expire at the end of the year. This could put millions of borrowers at risk of facing massive tax liability associated with debt cancellation.
The legislation is just one piece of congressional Republicans’ plans to enact much of President Donald Trump’s legislative agenda through the budget reconciliation process, which would allow the GOP to pass a massive bill through narrow party-line votes in the House and the Senate.
“Pro-family, pro-worker tax provisions are the heart of President Trump’s economic agenda that puts working families ahead of Washington and will create jobs, grow wages and investment, and help usher in a new golden age of prosperity,” said House Ways and Means Committee Chairman Jason Smith (MO-08) in a statement on Friday.
Republican lawmakers want to extend and expand an array of tax cuts that are scheduled to expire at the end of 2025 without legislative action. To pay for the costs of those cuts, which could add trillions of dollars to the national debt, GOP lawmakers are proposing significant spending reductions, including major reforms to student loan forgiveness and repayment programs that could cut off debt relief and increase the monthly payment requirements for millions.
Here’s what the narrow student loan forgiveness tax relief extension would mean for borrowers.
Student Loan Forgiveness Tax Relief Set To Expire At The End Of 2025
Historically, most forms of student loan forgiveness, discharge, and cancellation have been taxable events for borrowers. Lenders and loan servicers would issue a Form 1099-C for the tax year in which the student debt was forgiven, requiring borrowers to report the amount of cancelled debt as “income” on their federal (and, if applicable, state) tax return. Borrowers would then be required to pay income taxes on that cancelled debt, as if they earned the amount of the forgiven balance in income. For large balances, this can lead to devastating tax consequences unless the borrower can qualify for an exemption, such as through insolvency.
In 2017 during the first Trump administration, Republican lawmakers passed the Tax Cuts and Jobs Act which included the slew of tax cuts and benefits that current GOP lawmakers are hoping to extend beyond 2025. Included in that legislation was a temporary exemption for federal student loan forgiveness based on death and disability. While federal student loan borrowers are entitled a discharge upon their death, historically that discharge would have been taxable to the estate. The same was true for borrowers requesting relief through the Total and Permanent Disability discharge program. But the 2017 Tax Cuts and Jobs Act temporarily ended federal taxation on these forms of loan forgiveness until January 1, 2026.
Then, in 2021 during the Biden administration, Democratic lawmakers passed the American Rescue Plan Act. Included in that legislation was a provision that broadly exempted all federal student loan forgiveness from taxation under federal law. This meant that borrowers receiving loan forgiveness under other programs – in particular, through income-driven repayment plans – have not had to face federal tax consequences. But this exemption is also set to expire at the end of 2025.
“If your loans are discharged on or after Jan. 1, 2021, and before Jan. 1, 2026, you won’t get taxed by the federal government,” says Department of Education guidance on IDR student loan forgiveness. “Any debt forgiven as a result of IDR forgiveness won’t create a federal tax liability for you. The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt. Specifically, the law excludes from gross income qualifying student loans that are discharged on or after Jan. 1, 2021, and before Jan. 1, 2026. During this period, the amounts of forgiven student loan debt won’t be subject to federal taxation.”
GOP Would Extend Student Loan Forgiveness Tax Relief For TPD Discharges And Death, But Not IDR
In the proposed reconciliation legislation unveiled on Friday by GOP lawmakers on the House Ways and Means Committee, the tax relief on student loan forgiveness for TPD discharges and death would be extended.
“In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income for such taxable year by reason of the discharge (in whole or in part) of any loan described in subparagraph (B),” if the student loan balance was “otherwise discharged on account of death or total and permanent disability of the student,” reads the legislative text. The exemption would cover both the federal TPD discharge program, as well as similar discharge programs for “a private education loan as defined in section 140(a) of the Consumer Credit Protection Act.”
The extension of this tax relief would be critical not only for borrowers who may need to request TPD discharge relief in the coming years, but also for borrowers who have already been approved for student loan forgiveness under the program within the last two years. That’s because the TPD discharge program has a three-year post-discharge monitoring period, and most borrowers (except for veterans) who are approved for relief under the TPD discharge program would not get hit with the tax consequences until after the three-year post-discharge monitoring period ends.
“You’re considered to have received the discharge for federal tax purposes at the end of the post-discharge monitoring period,” says current Department of Education guidance. “For example, say your discharge was approved in July 2022. If so, you would not be considered to have received the discharge for federal tax purposes until July 2025, at the end of your monitoring period. In this case, the IRS would not consider the discharged loan amount to be taxable income for federal tax purposes.” But borrowers approved for a TPD Discharge starting in 2023 would not end their monitoring period until 2026 or later, after the TPD discharge tax relief provisions would otherwise expire. So the extension of the tax exemption will provide critical relief to these borrowers.
However, the GOP legislation would not extend the student loan forgiveness tax relief that is separately set to expire under the American Rescue Plan Act. As a result, starting on January 1, 2026, student loan forgiveness under IDR plans and a handful of other programs will revert to being taxable again, leading to potentially severe tax consequences for borrowers who reach their loan forgiveness threshold in the coming years. Profession-based student loan forgiveness, such as Public Service Loan Forgiveness (or PSLF) and Teacher Loan Forgiveness, should remain tax-free federally as it is always has been, barring any separate legislation by Congress. Most states will mirror the federal tax treatment of student loan forgiveness, but not all.
Student Loan Forgiveness And Affordable Payments Threatened By Other GOP Actions
Separately last month, the House Education and Workforce Committee unveiled reconciliation-related legislation that would reshape the federal student loan system. If enacted, the bill would repeal several existing income-driven repayment plans and push out student loan forgiveness thresholds to 30 years for many borrowers, while cutting off loan forgiveness entirely for others. The bill would also impose new restrictions on PSLF, and limit pathways to relief for borrowers whose school closed or engaged in misconduct.
The Department of Education also initiated involuntary collections efforts against defaulted federal student loan borrowers last week, putting many at risk of wage garnishment and federal benefits offset. Some borrowers could be trapped in default as a result, with traditional student loan forgiveness pathways cut off. The Student Borrower Protection Center characterized the resumption of collections actions against borrowers in default as “cruel, unnecessary, and will further fan the flames of economic chaos for working families across this country.”
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