Republican lawmakers are exploring several proposals that may increase tax burdens on both students currently in school and millions of student loan borrowers already in repayment. These changes could be included in a sweeping tax bill that GOP leaders aim to pass through reconciliation, allowing for a party-line vote that bypasses the Senate filibuster. With Republicans holding slim majorities in both the House and Senate, the proposed measures could significantly impact the financial landscape for students and borrowers alike.

Proposed Tax Increases on Students and Borrowers

At the core of the GOP’s tax strategy is an effort to extend and possibly expand tax cuts for corporations, households, and estates. However, to offset the projected $4 trillion in lost revenue, lawmakers are considering major cuts to federal spending, including rollbacks of tax relief for students and borrowers.

These considerations come amid backlash over an executive order issued by the Trump administration that called for broad federal spending freezes. Although the administration later rescinded the memo behind the order, it signaled that spending cuts remain a priority.

Eliminating the Student Loan Interest Tax Deduction

One of the key measures under consideration is the removal of the student loan interest tax deduction. Currently, borrowers can deduct up to $2,500 in student loan interest paid annually, with the benefit phasing out for higher-income earners. According to IRS guidelines, this deduction applies to both required and voluntarily prepaid interest payments.

A House Budget Committee memo, obtained by Politico, explicitly lists the elimination of this deduction as a cost-saving measure. Lawmakers estimate that removing this benefit would save $30 billion over ten years.

End of Tax Relief for Student Loan Forgiveness

Another potential tax change involves the expiration of federal tax exemptions on student loan forgiveness. Under the American Rescue Plan Act of 2021, student loan forgiveness across all federal programs is currently tax-free at the federal level. This provision is set to expire at the end of 2025, and Republican lawmakers have not signaled any intention to extend it.

If no extension is granted, forgiven loan amounts could once again be considered taxable income. For example, a borrower receiving $30,000 in loan forgiveness could face a $6,000 tax bill if subject to a 20% income tax rate.

Certain programs—such as Public Service Loan Forgiveness, Teacher Loan Forgiveness, and Borrower Defense to Repayment—were already exempt from taxation before the passage of the American Rescue Plan Act. However, without Congressional action, other forgiveness programs could once again become taxable.

Taxation of Scholarships and Fellowships

Currently, scholarships and grants used for tuition and related expenses are not subject to federal taxation. However, Republican lawmakers are contemplating changes that would make all scholarship and fellowship income taxable.

According to the House Budget Committee memo, eliminating the tax exclusion for scholarships and fellowships could generate an additional $54 billion in revenue over a decade. If enacted, this change could impose significant financial burdens on students who rely on scholarships to fund their education, potentially forcing them to pay thousands of dollars in taxes on aid meant to ease the cost of college.

Additional Costs for Student Loan Borrowers

The potential tax hikes could be compounded by additional policy changes affecting student loan borrowers. GOP leaders have expressed interest in repealing the SAVE plan, a signature initiative under President Biden that reduced monthly payments for millions of borrowers. Without this plan, borrowers could be forced into more expensive repayment options, with some facing monthly payments several times higher than before.

Furthermore, new income recertification requirements could lead to unexpected spikes in payments for borrowers who were previously benefiting from reduced rates.

The Potential Impact on Borrowers and Students

If these measures move forward, they could reshape the financial landscape for students and borrowers, making education and loan repayment significantly more expensive. Organizations like the Student Borrower Protection Center have warned that these cuts would create economic instability, with millions of Americans facing rising loan payments and higher education costs.

As discussions continue, students, borrowers, and advocates will be closely monitoring how these potential changes unfold and whether lawmakers will prioritize educational accessibility or fiscal tightening at the expense of those pursuing higher education.