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Senator Elizabeth Warren and a group of Democratic lawmakers have called on the U.S. Treasury and Internal Revenue Service to act swiftly to prevent what they describe as a looming “tax bomb” for millions of student-loan borrowers.
In a letter to Treasury Secretary Scott Bessent, obtained exclusively by Business Insider, the lawmakers urged the administration to use its existing authority to extend the tax-free status of student-loan forgiveness beyond its scheduled expiration in January 2026.
The 2021 American Rescue Plan made all forms of student-debt relief tax-exempt through 2025. Without further action, any loan forgiveness granted from 2026 onward would be treated as taxable income, potentially adding thousands of dollars to borrowers’ bills.
Advocacy group Protect Borrowers estimates that Americans receiving debt cancellation through income-driven repayment (IDR) plans could face tax liabilities of $5,800 to $10,000 once the exemption expires.
“By punishing IDR beneficiaries with massive tax bills, the federal government undermines the very purpose of the program,” Warren and her colleagues wrote, warning that such an outcome would be a “financial disaster for working-class Americans.”
The lawmakers suggested that the administration could rely on the general welfare exclusion, arguing that IDR forgiveness inherently reflects financial need, and thus should remain exempt from taxation.
The letter follows the Biden administration’s recent resumption of forgiveness processing for borrowers who completed their qualifying payments under IDR plans. Borrowers whose relief takes effect in 2025 will remain exempt from tax, even if processing occurs in early 2026, according to the Education Department.
Meanwhile, the department has reached a legal agreement with the American Federation of Teachers to accelerate IDR application reviews following a lawsuit alleging administrative delays.
The Treasury and IRS have not commented on whether they plan to act before the tax-free provision expires.
