Louisiana borrowers to face biggest ‘tax bomb’ from student loan forgiveness

Some Louisianians could see their tax bills triple — the biggest increase in the country — following the expiration of a law that kept forgiven student loan debt from being treated as income, according to a new report. 

Student loan debtholders in Louisiana and the rest of the South are expected to be the hardest hit because they tend to have larger balances and lower incomes, according to the analysis from Protect Borrowers, an advocacy group that studies the impact of various types of debt. Mississippi, Arkansas, Alabama, Kentucky and South Carolina also rank in the top 10 for states that will see the largest income tax increases.  

In 2021, Congress exempted cancelled debt from federal student loans from being treated as taxable income, but lawmakers allowed that exemption to expire Dec. 31, 2025. 

Roughly 2 million to 3 million borrowers who will have their debt cancelled in the next decade can expect a “tax bomb,” according to the analysis. The additional taxes impact federal student loan borrowers who are on an income-driven repayment plan, which bases monthly payments on their take-home pay and the size of their families.

For Louisiana, the average student loan borrower can expect an additional tax cost of $7,668 from cancelled debt for tax year 2026. That’s roughly $300 more than the rate in Mississippi and nearly $800 than Arkansas.

“This tax bomb will force millions of working-class families, who have been diligently making payments for two decades or more, to trade their student loan debt for debt to the IRS,” said Jennifer Zhang, author of the Protect Borrowers report.

The report recommends that Congress and state legislatures pass laws to end taxation of cancelled student loan debt.