Possible Tax Changes To Be Aware of If You Have Student Loans
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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President Donald Trump’s second term has reignited uncertainty around federal student loan policies — and for millions of borrowers, that includes how loans could affect their taxes.
With potential changes to forgiveness programs, interest deductions and income-driven repayment plans, borrowers may be facing a very different tax landscape in the near future.
Here’s what you need to know and how to prepare.
The Relationship Between Student Loans and Taxes
Under current law, student loan forgiveness is generally considered taxable income unless an exemption applies, according Ken Ruggiero, CEO and chairman at Ascent Funding. However, through 2025, federal loan forgiveness under specific programs is tax-free.
“Future changes in tax law could reintroduce taxation on forgiven student loans, so borrowers should plan accordingly as even with no changes in tax law, federal loan forgiveness for programs other than Public Service Loan Forgiveness (PSLF) will likely become taxable after 2025,” he said.
He encouraged borrowers to explore all available repayment and forgiveness options while keeping tax implications in mind. For instance, in some circumstances, it might make more sense to transfer federal loans to private loans that don’t carry the same uncertainty around taxation of loan forgiveness. This could reduce the potential tax burden that could arise from any shifts in federal policy, he explained.
The American Rescue Plan Act (ARPA)
The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through 2025. This applies to federal and certain private loans discharged under qualifying programs. For federal loans, forgiveness under PSLF is currently scheduled to remain tax-free after 2025 and for private loans, only discharges for death and total and permanent disability are covered under ARPA.
If interest remains paused or forgiven, borrowers may not have qualifying interest payments to deduct. “This could impact tax filings for those who previously relied on the deduction. It’s important to plan for potential tax implications when interest payments resume.”
However, state tax treatment may vary, so borrowers must verify with their state tax authority.
How the Trump Administration Is Handling Student Loan Policies
If you’re getting the student loan interest deduction, which allows borrowers to deduct up to $2,500 of paid interest from your taxable income, be sure to claim it this year, as it may not last. The Trump administration has proposed eliminating the student loan interest deduction, Ruggiero said.
Additionally, Trump’s administration is reviewing potential changes to the PSLF program that could impact eligibility. There are also discussions about restructuring student loan oversight, potentially shifting responsibility from the Department of Education to other agencies.
“Borrowers should monitor policy discussions and consider how future elections may impact student loan taxation,” Ruggiero said.
Tax and Income Driven Repayment Plans
Income-driven repayment (IDR) plans base monthly payments on adjusted gross income (AGI). Changes to these plans, such as adjusted income thresholds or new repayment options, could affect tax liability, Ruggerio warned.
“Under the Trump administration, recent developments have included a temporary suspension of IDR applications following a court injunction against the previous administration’s SAVE Plan. Applications for alternative IDR plans like Income-Based Repayment (IBR) and Pay As You Earn (PAYE) have since reopened.”
Additionally, he explained that the administration has proposed revisions to IDR plans that may alter eligibility criteria or reduce forgiveness options. “These changes could impact borrowers’ tax filings, particularly for those choosing to file jointly or separately.”
See If You’re Eligible for These Tax Credits
There are several tax credits that can potentially reduce tax liability, Ruggiero shared. The student loan interest deduction allows eligible borrowers to deduct up to $2,500 of paid interest from taxable income. Additionally, the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit (AOTC) can provide education-related tax benefits.
“Borrowers should consult a tax professional to help maximize these opportunities,” he said.
What Private Loan Borrowers Need To Know
Private loan borrowers are not eligible for federal forgiveness programs and may have different tax considerations, Ruggiero shared. “They should confirm whether their lender offers interest reporting for tax deductions and explore employer assistance programs for repayment support.”
Stay Prepared
While it’s hard to predict what the Trump administration might do next, Ruggiero recommended that borrowers regularly review their repayment strategy, stay updated on policy changes and consult tax professionals for guidance. “Additionally, keeping detailed records of payments and potential deductions will ensure they are prepared for any future tax law adjustments.”
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