Will Student Loan Forgiveness Programs Lead to Tax Problems?

IRS Tax Relief AttorneyFor many people in the United States who share in owing the estimated $1.3 trillion in student loan debt, loan forgiveness plans may sound like a dream come true. There are two major loan forgiveness programs in place currently, which are:

  • You work in public service for a period of time and your loan balance is forgiven; or
  • You complete an income-based repayment plan and the balance is forgiven.

While both of these programs end in forgiveness of the remainder of your debt, there is one very important difference between them – forgiveness due to public service is tax-free while income-based repayment forgiveness is definitely not.

Anyone on an income-based repayment plan for their student loans should be aware of the potentially significant tax implications of the ultimate loan forgiveness. The amount of debt that is forgiven will be taxed that year as income earned. This means if you make $50,000 regularly and have $120,000 worth of student loan debt forgiven, you will be taxed as if you earned $170,000 that year. Considering your tax withheld on your paycheck was only based on your income, you will owe a hefty tax debt that will likely be impossible to pay all at once.

While no one has yet been eligible for an income-based repayment forgiveness, others have had student loans discharged due to permanent disability or death and have faced crippling tax blows. Students who are trying to get their loans discharged due to school closures or school fraud will also face the tax implications of the discharge.

There are ways to resolve IRS tax debts, including installment payments and offers in compromise. However, you will need to be prepared to address the situation to avoid any wage garnishments, levies, or other harmful IRS collection methods.

Discuss Your Situation with an IRS Tax Relief Attorney Today

If your student loans will be discharged or forgiven in recent years, seek help from an experienced IRS debt attorney who can help you address the situation. Please call the legal team at Attorneys Tax Relief LLC at 800-819-6866 for assistance today.

1https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven

2https://www.irs.gov/businesses/small-businesses-self-employed/levy

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