Warren, Senators Urge Trump Administration to Stop Imminent “Tax Bomb” for Student Loan Borrowers
Borrowers who earn income-driven repayment cancellation after decades of payments could be hit with tax bills as high as $10,000
“The Treasury Department and Internal Revenue Service should move immediately to avoid this financial disaster for working-class Americans.”
Washington, D.C. - U.S. Senator Elizabeth Warren (D-Mass.), a member of the Senate Finance Committee, led her 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. Senators Bernie Sanders (I-Vt.), Ranking Member of the Senate HELP Committee; Jeff Merkley (D-Ore.); Richard Blumenthal (D-Conn.); Chris Van Hollen (D-Md.); Tammy Duckworth (D-Ill.); Mazie Hirono (D-Hawaii); Cory Booker (D-N.J.); and Kirsten Gillibrand (D-N.Y.) joined the letter as well.
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 senators 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.”
“President Trump and his allies in Congress passed the One Big Beautiful Bill Act to cut taxes for billionaires while hiking taxes for thousands of student loan borrowers who have earned debt relief after paying for decades,” said Persis Yu, Deputy Executive Director and Managing Counsel for Protect Borrowers. “This tax bomb will force working families to trade their crushing student loan debt for a crushing tax debt. We applaud Senator Warren for taking the lead and demanding the Trump Administration take immediate action to protect these borrowers from being needlessly pushed further into debt. Policymakers must address this tax bomb before it is too late.”
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