~ Borrowers who earn income-driven repayment cancellation after decades of payments could be hit with tax bills as high as $10,000 ~
WASHINGTON, D.C. – U.S. Senator Mazie K. Hirono (D-HI) joined Senator Elizabeth Warren (D-MA) and seven colleagues in a letter urging Secretary of the Treasury & Acting IRS Commissioner Scott Bessent to use the IRS’s existing legal authorities to stop the looming “tax bomb” facing borrowers who obtain income-driven repayment (IDR) discharges of their student loan debt.
In 2021, Congress passed into law a provision excluding student debt cancellation from taxable income. As a result, borrowers who received student debt relief after years of repayment were not faced with high and unexpected tax bills.
However, that provision is set to expire at the end of this year. Absent action from President Trump or Republicans in Congress, this expiration will mean that borrowers on IDR plans who have legally earned debt cancellation after 20 or 25 years of repayment will be hit with significant tax bills.
“If neither the Trump Administration nor the Republican-controlled Congress act soon, families who earn student debt cancellation after paying their loans for decades will be hit with surprise tax hikes—as high as $10,000 in many cases—starting next tax year,” wrote the senators. “The Treasury Department and Internal Revenue Service should move immediately to avoid this financial disaster for working-class Americans.”
New data from Protect Borrowers reveal that a typical family headed by a borrower receiving IDR cancellation (i.e., a married parent with two children earning $50,000 a year) could see their tax bill spike by $8,789. A similar family making $40,000 a year could shoulder a net tax increase of $10,295. Lower-income borrowers and borrowers with children would likely be forced to pay the most, as they stand to lose access to critical programs like the Earned Income Tax Credit and the refundable portion of the Child Tax Credit.
In their letter, the senators laid out the legal case for the Trump administration’s options to defuse the IDR “tax bomb.” In particular, they argued that the insolvency exclusion, scholarship exclusion, and general welfare exclusion were all options to declare IDR discharge as non-taxable income. The lawmakers also noted that, in 2020, the Trump Administration delivered similar relief to recipients of closed school discharge and borrower defense to repayment, excluding those discharges from taxable income using its administrative authorities.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the IDR program and reneges on its promises to borrowers,” the senators concluded. “Instead of compounding this problem by denying legally owed IDR discharge to borrowers, the Administration can and should deliver certainty and relief to these families as soon as possible.”
In addition to Senators Hirono and Warren, the letter was also signed by Senators Richard Blumenthal (D-CT), Cory Booker (D-NJ), Tammy Duckworth (D-IL), Kirsten Gillibrand (D-NY), Jeff Merkley (D-OR), Bernie Sanders (I-VT), and Chris Van Hollen (D-MD).
The full text of the letter is available here.
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