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Tax Byte
The Tax Impact First: While much of the attention around President Trump’s “One Big Beautiful Bill Act” (OBBBA) focused on extending TCJA provisions, two significant student loan tax changes deserve immediate attention from practitioners.
Key Tax Changes Taking Effect
Loan Forgiveness Returns to Taxable Status in 2026
The American Rescue Plan Act (ARPA) made student loan forgiveness tax-free from 2021 through 2025, but this provision expires December 31, 2025. Starting with the 2026 tax year, forgiven student loan debt becomes taxable income again with only narrow exceptions.
The exceptions that remain tax-free include Public Service Loan Forgiveness (PSLF) and forgiveness for borrowers who become totally and permanently disabled. Debt discharged because of death also remains non-taxable. Everything else—including forgiveness under the new 30-year repayment plan and most hardship-based forgiveness—now triggers taxable income.
This creates a significant tax planning challenge. Borrowers entering the new 30-year repayment plans could face substantial tax bills on forgiven amounts decades from now.
Employer Student Loan Assistance Gets Permanent Status
The bill permanently extends the $5,250 annual limit for tax-free employer student loan assistance and indexes it to inflation starting in 2026. This benefit was scheduled to expire January 1, 2026, but now it’s here to stay.
For clients with employer programs, this becomes significantly more valuable as borrowers face longer repayment periods under the new rules. Practitioners should review whether clients are maximizing this benefit, especially those switching to the new 30-year repayment plans.
Student Loan Interest Deduction Remains Stuck
Despite completely rewriting federal loan programs, Congress left the student loan interest deduction untouched at $2,500 annually. This creates an odd disconnect—borrowers will likely carry debt longer under the new system, but the tax relief stays frozen at 1990s levels.
The deduction phases out at the same income levels, meaning many graduate degree holders won’t qualify anyway. With new borrowing caps pushing more students toward private loans, practitioners need to understand which loans qualify for the deduction and which don’t.
ARTICLE CONTINUES BELOW
The Student Loan Program Overhaul
Now for the bigger picture. Starting July 2026, the federal student loan system gets its most dramatic overhaul in 60 years. These aren’t minor tweaks—they’re fundamental changes that will reshape how families pay for college.
New Borrowing Limits Hit Hard
Graduate students face the biggest shock. The unlimited Graduate PLUS program disappears completely. Instead, master’s degree students can borrow just $20,500 annually with a $100,000 lifetime cap. Professional programs (law, medicine, dental) get $50,000 annually and $200,000 lifetime.
Parents get squeezed too. Parent PLUS loans, currently available up to the full cost of attendance, get capped at $20,000 per year with a $65,000 lifetime limit per student.
The new universal lifetime borrowing limit across all federal programs: $257,500. For families planning expensive graduate programs, these numbers don’t add up to current costs.
Repayment Simplifies—But Safety Nets Disappear
Starting July 2026, new borrowers get two choices: standard repayment or the new “Repayment Assistance Plan” that takes 1% to 10% of income for up to 30 years, with forgiveness after 30 years.
Here’s where it gets rough for existing borrowers. Popular plans like SAVE, PAYE, and Income-Contingent Repayment get phased out starting July 2026. The 7.7 million borrowers currently on SAVE face interest accumulation starting August 1, 2025 and must switch plans by July 2028.
The real kicker: starting July 2026, you can’t pause payments anymore for job loss or financial hardship. For loans taken after July 2027, unemployment and economic hardship deferments disappear entirely.
Forgiveness and Tax Consequences
Public Service Loan Forgiveness stays tax-free, though qualification rules may tighten. For the new 30-year forgiveness plan, borrowers will likely owe taxes on forgiven amounts—just like current income-driven plans.
With longer repayment periods, forgiven amounts could be substantial. Practitioners should help clients understand potential tax bombs decades down the road and consider whether Roth conversions or other strategies make sense during lower-income years.
Collection Gets Aggressive
The administration plans tougher collection from defaulted borrowers. Wage garnishment, tax refund seizures, and even Social Security benefit garnishment are back on the table. This affects not just borrowers but potentially family members who co-signed or consolidated loans.
Immediate Action Items
For Current SAVE Plan Borrowers
Interest starts accumulating August 1, 2025—roughly $3,500 more annually for the average borrower. These clients need new repayment plans before July 2028.
For Parent PLUS Borrowers
To stay eligible for income-driven payments, Parent PLUS loans must be consolidated, and parents must enroll in Income-Contingent Repayment by June 30, 2026. Miss this deadline, and they’re stuck with standard payments only.
For Families Planning College (Fall 2026 and Later)
Research total program costs against new borrowing limits. The math won’t work for many graduate programs without significant private borrowing or family resources. Recommend maxing out 529 contributions now while loan access remains unrestricted.
Planning Considerations
Build emergency funds given the elimination of hardship deferments. Research state tax treatment of loan forgiveness—states vary widely on taxability. For high earners, private loans might offer better terms than the new federal programs.
The employer student loan benefit becomes more crucial as federal options shrink. Make sure clients understand this benefit and push employers to offer it if they don’t already.
The Bottom Line
This represents the end of unlimited federal borrowing for higher education. Whether you see this as necessary cost control or an access barrier, the changes are dramatic and immediate.
Families planning for college need to completely rethink their strategies. Existing borrowers face significant disruption to their repayment plans. The tax implications, while limited, create both opportunities and pitfalls that require careful planning.