Key Takeaways
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A major tax change is coming: student loan forgiveness under IDR becomes taxable again starting January 1, 2026, unless Congress extends current relief.
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Borrowers nearing the 20- or 25-year forgiveness point could face thousands, or even tens of thousands, in unexpected federal taxes.
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Increased taxable income may reduce eligibility for key credits such as the Earned Income Tax Credit or Child Tax Credit.
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Small and mid-sized business owners and their employees should begin tax modeling and planning now to avoid surprise liabilities in 2026.
If you’re carrying substantial student debt, there is a major tax change on the horizon that you shouldn’t ignore.
For the past several years, borrowers whose federal student loans were forgiven under Income-Driven Repayment (IDR) plans haven’t had to worry about a federal tax bill on the forgiven amount. Thanks to a temporary provision in the American Rescue Plan Act of 2021, any qualifying loan forgiveness issued from 2021 through the end of 2025 is excluded from taxable income.
Once the calendar flips to January 1, 2026, that protection ends unless Congress intervenes.
This means that borrowers who reach the 20- or 25-year forgiveness milestone after that date could once again face a federal tax bill on the balance that’s wiped away. Analyses from multiple advocacy groups indicate that borrowers could owe several thousand dollars, or, in some cases, tens of thousands, depending on income, family size, and the amount forgiven.
For small to mid-sized business owners, or really anyone with large educational loans, this shift could be especially painful.
Why Borrowers Are at Risk
Professionals across many industries, especially those in healthcare, law, engineering, technology, and social services, often graduate with significant student loan debt. Six-figure balances are increasingly common, and many borrowers rely on Income-Driven Repayment (IDR) plans during career transitions, business launches, or periods of variable income.
When the federal tax exclusion for forgiven student debt expires on December 31, 2025, borrowers receiving IDR forgiveness beginning in 2026 will face an important change:
- Any forgiven balance will be treated as taxable ordinary income
- The additional income may push borrowers into a higher tax bracket
- Refundable credits such as the Earned Income Tax Credit or Child Tax Credit may be reduced or eliminated
- Borrowers with moderate incomes or dependents could feel the biggest financial strain
This creates meaningful financial exposure not only for business owners themselves, but also for key employees who have been making lower IDR payments for decades.
What This Might Look Like in Real Life
Scenario A: A Mid-Career Professional Nearing Forgiveness
A project manager earning $60,000 has been on an IDR plan for 22 years. In 2026, her final $17,000 is slated for forgiveness. Once the exclusion expires, that amount becomes taxable income, creating a surprise federal tax bill of several thousand dollars.
Scenario B: A Small Business Owner With Remaining Graduate School Debt
A business owner who kept payments low while growing their company still owes $85,000 that will be forgiven in 2027. If taxable, their federal bill alone could exceed $18,000, due in the same year they’re handling payroll, capital improvements, and operational expenses.
These situations are more common than many realize, especially for borrowers approaching the end of 20- or 25-year repayment terms.
What Small and Mid-Sized Business Owners Should Do Now
Uncertainty still surrounds how the IRS or Congress may act, but preparing early is far safer than waiting.
- Estimate Your Potential Exposure: Review your forgiveness timeline and calculate the tax impact if your remaining balance becomes taxable in or after 2026.
- Build the Possibility Into Your Tax Strategy: A proactive tax plan may include:
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- Adjusting estimated quarterly payments
- Increasing retirement contributions to reduce taxable income
- Evaluating whether an entity structure change would help
- Strategically timing major business deductions or purchases
- Consider the Impact on Your Team: Many employees, including managers, administrative staff, and licensed professionals, use IDR repayment. A sudden tax bill could affect morale, retention, and financial wellness.
- Avoid a Last-Minute Scramble: Unexpected tax liabilities often hit at the worst possible time, right after the holidays and just as a new tax year begins.
Don’t Wait for Washington & Start Planning Now
If federal tax relief for student loan forgiveness is not extended beyond December 31, 2025, borrowers will feel the effects immediately when filing their 2026 tax returns. For business owners and anyone carrying long-term student debt, advance planning is the best form of protection.
Our team can help you:
- Project your potential tax liability
- Integrate student loan considerations into your broader financial plan
- Adjust estimated payments before they become a problem
- Build a proactive strategy for 2026 and beyond
The rules may change, but preparing now ensures you’re protected either way. Reach out to us to create a tax plan that keeps your financial future secure.