by Sam Freeman and Medill Illinois News Bureau
For the first time in five years, certain forms of student loan forgiveness will be taxable following a change in federal tax policy this year.
This comes after a provision of the American Rescue Plan Act expired Dec. 31. That measure, signed into law in 2021 by former President Joe Biden, temporarily excluded student loan debt from federal income taxes.
And those tax implications could extend to Illinois state taxes as well unless lawmakers act.
President Donald Trump’s “One Big Beautiful Bill Act,” enacted last summer, did not make the student loan tax forgiveness provision permanent. As a result, student loans that are canceled or partially forgiven in 2026 and beyond will see taxes owed on those forgiven amounts, advocates said. These taxes could amount to as much as $10,000, depending on the borrower’s income.
This includes income-driven repayment plan-related forgiveness; some closed school discharges — where 100% of a student loan obligation is wiped out if a school closes — and private settlements. Meanwhile, some forms of loan forgiveness remain tax-free, such as public service loan forgiveness, teacher loan forgiveness, and death and disability discharge programs.
According to a report from Protect Borrowers, a nonprofit organization dedicated to eliminating the burden of student debt, two-thirds of people who receive loan cancellation under income-driven repayment plans earn less than $50,000 a year and have less than $1,000 in savings.
“A tax bomb on people with that amount of assets and that amount of income, it could be really financially devastating,” said Jennifer Zhang, a researcher for Protect Borrowers.
A group of congressional Democrats, including U.S. Sen. Tammy Duckworth, sent a letter to Treasury Secretary and Acting IRS Commissioner Scott Bessent on Nov. 9 calling the tax reinstatement a “financial disaster for working-class Americans.”
Illinois will also tax loan forgiveness
In addition to federal taxes, some borrowers will also face a similar tax hike at the state level. Illinois is one of 20 states whose tax codes automatically conform to the federal change. This means that unless Illinois legislators decouple the conforming provision before taxes are due next year, student loan forgiveness amounts will also be taxed by the state.
“I would certainly be supportive of (decoupling),” Sen. Mike Halpin, D-Rock Island, said, although it’s currently not an issue that has reached the Illinois state legislature.
