Millions of student loan borrowers face a financial crisis as a ‘tax bomb’ is set to detonate on New Year’s Day. The blast targets those on an income-driven repayment plan seeking forgiveness in 2026, potentially resulting in unexpected taxes of thousands of dollars on forgiven loans. Senator Elizabeth Warren and others are urging the Treasury Secretary to prevent this financial disaster for working-class Americans.

The average borrower seeking forgiveness on $49,321 in student debt could face a tax bill of $5,800 to $10,000 in owed taxes and lost credits. With the current provision expiring at the end of 2025, the impending tax bomb looms large. Most households lack the savings to cover such a tax bill, leading to potential IRS payment plans with added interest and penalty charges.

Borrowers must prepare for significant tax bills when their federal student loan balance is forgiven. Options include pursuing an insolvency exclusion, setting up a payment plan with the IRS, or saving ahead of time to cover the tax bill without incurring debt. Starting now to save or increase income through side hustles can help mitigate the impact of the impending tax bomb.

Read more at Yahoo Finance: A $10K ‘tax bomb’ on forgiven student loans starts ticking New Year’s Day, threatening borrowers with a new debt burden