Major financial shifts are set to impact student loan borrowers in 2026 as the federal tax exemption on forgiven debt expires, and the SAVE repayment plan is replaced by a new assistance program.
Return of the "Tax Bomb"
One of the most critical changes for 2026 is the reinstatement of federal taxes on forgiven student loan debt. The American Rescue Plan Act, which temporarily made student loan forgiveness tax-free, expired on December 31, 2025. Starting January 1, 2026, any debt canceled through programs like Income-Driven Repayment (IDR) may be treated as taxable income by the IRS.
This means borrowers who receive forgiveness could receive a Form 1099-C and face a tax bill based on their tax bracket. For example, a single borrower earning $60,000 who has $50,000 forgiven could owe roughly $10,000 to $13,000 in federal taxes. Borrowers are advised to consult tax professionals to prepare for this potential liability, according to Investopedia.
The End of SAVE and Start of RAP
The popular SAVE plan is effectively ending following legal challenges and new legislation. In its place, the Department of Education is introducing the Repayment Assistance Plan (RAP), scheduled to launch on July 1, 2026.
Key differences between the plans include:
Monthly Payments: Unlike the SAVE plan, which allowed $0 payments for many, the RAP requires a minimum monthly payment of $10 for all borrowers.
Income Calculation: RAP payments are calculated as 1% to 10% of total adjusted gross income (AGI), with a deduction of $50 per month per dependent child.
Transition: Borrowers previously on SAVE may be placed in forbearance or moved to other IDR plans until RAP becomes active, The College Investor reported.
FAFSA Updates for 2026-27
The Free Application for Federal Student Aid (FAFSA) for the 2026-27 school year includes further simplifications. Students can now list up to 20 colleges on their application, double the previous limit of 10.
The form continues to use the Student Aid Index (SAI) instead of the Expected Family Contribution (EFC) to determine eligibility, though new rules mean students with a high SAI may no longer qualify for Pell Grants.
Other Useful Information
Deadlines: The federal deadline for the 2026-27 FAFSA is June 30, 2027, but state deadlines may be as early as February or March 2026.
Loan Limits: New policies may cap lifetime federal loans for undergraduate and graduate studies, with reports suggesting a limit of around $257,500.
Recertification: Borrowers should watch for notices regarding income recertification, especially those transitioning from the defunct SAVE plan to new options, as per KPBS.
As 2026 reshapes the student loan landscape, borrowers face a new reality of taxable forgiveness and stricter repayment rules under the incoming Repayment Assistance Plan (RAP).
With the end of the tax-free waiver and the SAVE plan, alongside updated FAFSA procedures, passive management of student debt could lead to unexpected financial burdens. It is crucial for borrowers to review their repayment strategies now, budget for potential tax bills, and consult with financial professionals to navigate these significant regulatory changes effectively.
