Is the student loan forgiveness program really all it is cracked up to be or is it a sucker punch waiting to rob you of your inheritance?
According the IRS if your loans are forgiven that amount is considered taxable income. (And you thought the government was trying to do you a favor.) So if you have $100,000 of your student loan balance forgiven you will owe the IRS probably between $30,000 and $50,000 along with penalties and interest that accrue if you can’t immediately pay your tax bill or work out a payment plan. And so you go from owing the student loan organizations (Wall Street's hedge funds) or you owe the IRS.
And so unsuspecting students will go from owing the pathetic student loan machine to now owing the heartless IRS. Pick your poison.
Here is what Melanie Lockert, the Student Loan Hero wrote in August 2015.
“Under current Internal Revenue Service (IRS) rules, any loans forgiven under these programs are considered taxable income.
In short, this rules means that you could face a hefty tax bill when your loans are forgiven.
Let's say that after making payments under IBR for 25 years, you’re left with $40,000 in debt. That $40,000 in forgiven debt would be considered taxable income.
In this case, your lender would send both you and the IRS a 1099-C form, stating the amount of debt forgiven—the same amount you’ll use when completing the necessary tax forms.
So, though you may not have to pay $40,000 in student loans, you would still have a hefty tax bill to pay. That $40,000 in loan forgiveness could mean a $10,000+ federal tax bill, and that doesn't include potential state income taxes.
Of course, many variables determine your tax rate, but getting your loans forgiven could lead to a remarkably surprising tax bill.
If you can’t pay the tax bill, then you'd be forced to set up a payment plan with the IRS to make payments towards your tax debt. If you don’t take any action, then you could face a penalty and have to pay interest on this debt.
In another sense, if you dislike your student loan lender, then I imagine that you won’t be too fond of dealing with the IRS, either.”
Will Student Loan Forgiveness Rob You Of Your Inheritance all over again?
I absolutely hate what the student loan program has become. It is too easy to get money while in college. And it has become a wolf in sheep’s clothing with universities robbing this generation of their inheritance while providing a psychology degree which entitles the graduate degree holder to a buck more than the minimum wage. Probably not what they told you when you applied to college.
It is probably time to start doing some reading to figure out if your loan forgiveness really is forgiveness or just another form of misery.
- Would-be lawyer won't have $260K in student loans erased; SCOTUS refuses to hear appeal
- Beware Taxes When Your Student Loan Debt Is Forgiven
- Here's When You'll Owe Taxes on Student Loan Forgiveness
- Defusing the Student Loan Forgiveness Tax Bomb - Lawyerist
- For Student Borrowers, a Tax Time Bomb - The New York ...
- Publication 970 (2015), Tax Benefits for Education
- 1099-C FAQ’s, Read this before accepting a reduction in a bill of over $600. Divorcing couples should read this very carefully.
- 6 exceptions to paying tax on forgiven debt
- IRS, Student Loan Cancellations and Repayment Assistance and yes this is the IRS site.