Many people living in Maryland are struggling with debt from student loans. For those with government loans, options are available that can reduce their monthly payments and provide debt forgiveness after a long period of repayment. However, what many people entering these programs don’t realize is that they could face significant tax issues after the debt is forgiven.
Federal law makes it very difficult for borrowers of student loans to discharge those loans in bankruptcy. In some cases, this made things very difficult for borrowers with high debt levels who were unable to earn enough to make even minimum monthly payments. As a result, new repayment programs were developed that capped the monthly payment amount for many borrowers.
These plans are referred to as “income-driven” and limit the amount of the monthly payment to 10 percent of a borrower’s monthly income. After 20 years of making payments on undergraduate loans or 25 years on money borrowed for graduate studies, the balance is forgiven.
There is a dark side to these programs, however, as the IRS regards the forgiven balance as income and taxes the borrower accordingly. As a result, the borrower may have significant tax debt to contend with even after the loan balance is eliminated. For some people, particularly those who are nearing or in retirement, this tax debt can prove unwieldy.
Individuals and couples who are concerned about paying taxes on forgiven student loan debt may benefit from speaking with an experienced tax attorney. A lawyer may be able to review his or her client’s case and make recommendations regarding financial strategies that could limit his or her liability. An attorney may also be able to work out a repayment plan with the IRS.