Forgiveness Tax Bomb Estimator

If you expect part of your student loans to be forgiven at the end of an income-driven repayment plan, you may face a large tax bill that year, often called the "tax bomb." This calculator estimates the bill and how much to save each month so it doesn't catch you off guard.

What this calculator does

Enter the balance you expect to be forgiven, your other income that year, your filing status, state tax rate, years until forgiveness and the return on money you set aside. It shows:

• the estimated tax on forgiveness,
• the federal and state parts,
• the effective rate on the forgiven amount, and
• how much to save per month to cover it.

The formula in plain English

Federal tax = federal tax on (other income + forgiven amount) − federal tax on other income alone, using 2026 brackets and the standard deduction. This captures the fact that forgiveness pushes income into higher brackets.

State tax = forgiven amount × your state rate.

Effective rate = total tax ÷ forgiven amount.

Monthly savings = the amount that, saved monthly at your expected return, grows to the tax bill by the forgiveness date.

A worked example

Dr. Moore expects about $150,000 to be forgiven in 15 years. That year, she expects about $220,000 of other income. She's single and pays 5% state tax. She'll invest savings at 5%.

• Federal tax on the forgiveness: about $50,900.
• State tax: $7,500.
• Total: about $58,400, or about 39% of the forgiven amount.
• Save each month: about $219 for 15 years.

Saving a little each month turns a frightening one-time bill into a manageable plan.

Why it matters at each career stage

If you're: Resident / fellow

If you're choosing an income-driven plan in training, consider the long-term picture: lower payments now may mean a larger balance and tax bill later, unless you qualify for PSLF.

If you're: Employed

If you're not pursuing PSLF, run this alongside the IBR or RAP calculator. If the payments plus the tax bill come out close to paying the loan off, paying it off may be simpler.

Ways to reduce or avoid the tax bomb

Pursue PSLF if possible. PSLF forgiveness is tax-free.

Save in a separate account. A brokerage or high-yield savings account set aside for the tax.

Time other income. A year with lower income, like a sabbatical or partial retirement, lowers the bracket that forgiveness lands in.

Check insolvency. If your debts exceed your assets at the time, part of the forgiveness may be excluded.

Watch for law changes. Congress has changed these rules before. Check each year.

Where to keep the savings

Because the tax bill may be 10 or 20 years away, many people invest these savings in a diversified brokerage account rather than a savings account. As forgiveness gets closer, moving the money into safer investments protects it from a market drop right before the bill is due. A separate account labeled for the purpose helps keep it from being spent on other things. Review the target every year or two as your income, balance and the law change.

About the estimate

This uses today's tax brackets and dollars. Tax law, your income and your state could all change before forgiveness. Use the result as a planning target and revisit it every year or two.

Next, see your IBR payment or RAP payment, and compare with PSLF.