With more Americans than ever burdened by student loan debt, many are seeking out options for forgiveness or loan cancelation.
The good news is the Consumer Financial Protection Bureau estimates that one-fourth of the American workforce may be eligible for these forgiveness programs.
However, the process for obtaining forgiveness may be complicated and lengthy, and some programs may result in a large tax bill.
Student loan forgiveness, cancellation or discharge can occur based on profession, military service, public service or participation in an income repayment plan.
Other options include discharging loans due to total and permanent disability, college closure before graduation or false certification of student eligibility or unauthorized payment discharge.
There are two programs for teachers who work in low-income areas.
The Public Service Loan Forgiveness Program forgives the remaining balance on Direct Loans after 120 qualifying monthly payments while working for a government organization, not-for-profit organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code, full-time service in the AmeriCorps or Peace Core.
To receive loan forgiveness, an application is required after the 120th qualifying monthly payment.
The military provides a variety of student loan forgiveness options, but it is best to contact each branch for specifics. Some states also have student loan forgiveness programs.
Income-based repayment plans (IBR) and Pay as You Earn (PAYE) offer forgiveness after making payments for 20 to 25 years. This program caps payments at 10-15 percent of discretionary income.
Enroll in an IBR plan or PAYE plan by submitting a request, but keep in mind the loans forgiven under IBR or PAYE are taxable per current tax laws.
This means if a borrower only makes minimum payments for 20 to 25 years, the final balance can be much larger than the initial principal. The higher the loan balance means a larger tax bill.
Borrowers with forgiven loans will get a 1099-C that shows how much was forgiven on student loans, and the total will be included on a 1040 for that year.
We can expect to see the full impact of the tax liabilities incurred because of these programs begin around 2032.
There have been many discussions about reversing the current tax law, but lawmakers have not yet passed the bill. It is uncertain what legislation will be in place for taxpayers in 20 or 25 years when these borrowers begin receiving forgiveness.
One approach to prevent a significant tax bill is to make certain interest is not significantly increasing total debt, or determine what the tax liability may be and prepare accordingly before it is due.
While we do not specialize in student loan forgiveness, the Federal Student Aid website provides valuable information related to student loans and other types of financial aid.
If you are concerned about a tax liability after receiving student loan forgiveness or other types of loan forgiveness call to schedule a free consultation at 844-841-9857 or schedule a consultation online.