Beware of Taxes When Forgiving Student Loan Debt
Student loan debt is a major financial crisis and you can see how much it gets worse by the second . One federal program that offers assistance is income-oriented payments. You pay the loan based on your income. This will help you keep your head up, but be prepared to pay taxes if any debt is forgiven.
The federal government offers three types of income-focused plans:
- Income Based Repayment Plan (IBR Plan)
- Pay-as-you-go plan (pay-as-you-go plan)
- Contingent income repayment plan (ICR plan)
Each plan requires borrowers to repay a certain amount of their discretionary (non-material) income against the loan over 20 or 25 years. The balance of the balance is forgiven if it is not redeemed before maturity.
But Business Insider reminds us that you are required to pay taxes on the forgiven amount. Depending on how much it is, your tax bill can be quite large. If your loan is charging high interest, most of your total loan can be forgiven – meaning you paid thousands of taxes on the hook. To cite some numbers, the New York Times reported in 2012 an estimate made by the Office of Management and Budget:
OMB estimated that 400,000 borrowers from 2012 to 2021, each with an initial average loan balance of approximately $ 39,500, would eventually receive a loan forgiveness of approximately $ 41,000. Yes, you read that right. The forgiven debt will be larger than the original balance sheet, albeit many years later.
With a forgiven $ 41,000 loan, your federal tax bill can easily exceed $ 10,000 depending on your tax category. There are also government income taxes to contend with, depending on where you live.
Whatever the amount, you will pay taxes on it in the year of debt forgiveness. So you may not have to worry about it now, but it should be kept in mind for the future. It works the same way as paying off debt. The government treats the forgiven amount as taxable income and you will receive 1099-C. You will need to report that when you prepare your taxes this year and if you don’t pay, you may be fined.
There are several tax exemptions for student loan forgiveness. FinAid.org notes that teacher loan forgiveness programs, law school assistance programs, and the National Health Service Loan Repayment Program, for example, are tax-free.
Bottom line: make sure you know the details of the program you are participating in. For more information, see Business Insider’s full post on the topic below.
There Will Be Huge Benefit If the Federal Government Forgives Your Student Debt | Business Insider