Student Loan Forgiveness May Include a Tax Bill

There are generally two ways to handle student debt: To pay it down is the go-to option for most borrowers, but some borrowers may be able to have their loans forgiven.

Things to know before seeking student loan forgiveness:

  • It only applies to government loans
  • You have to qualify
  • It may include a tax bill

Who gets to wipe out their student debt

Public Service Loan Forgiveness is a program for professionals who work for government organizations, tax-exempt nonprofits, and nonprofits that provide what the government defines as qualifying public service such as law enforcement, public education, and public health jobs. (The Department of Education site goes into detail about loan forgiveness here.)

However, working in a do-good capacity isn’t enough to qualify. The program only applies to certain types of federal loans, you have to make 120 consecutive payments while working for a qualified employer, and you may still end up having to pay the bill, depending on your income.

But if you hit these marks and apply for forgiveness before completing 120 payments, you may see the balance disappear after 10 years. End of story. The balance in this case is not considered income, so there is no tax bill.
Who may eliminate debt but still pay

Students whose employers don’t make the public service list and who are repaying their federal loans from the list of government programs that include the income-contingent repayment plan (also known as ICR) and the pay-as-you-earn-repayment plan (PAYE) may be able to get their loans forgiven, but there are limits:

It’s only an option for certain federal loans, you need to make payments over the course of 20 or 25 years, and the government still takes a look at how your income stacks up against what you owe after more than two decades.

In this instance, if the government gives the OK, it’s important to know that the balance may not be really gone. You may have to cut a check to the IRS because forgiven student loan balances are considered income.*

If you can’t be forgiven, pay less

You still have an option if a student loan isn’t forgiven: you can refinance, which may save you money on interest and the total cost of the loan(s). Refinancing student loans saves Laurel Road customers an average of $20,000+ over the life of their loans.

Private loans don’t include umbrella forgiveness options, so refinancing them is a relatively straightforward way to save. You should note, though, that federal student loans have a few more factors to consider when it comes to refinancing, and we’ve outlined some of them here.

 

*Laurel Road, a division of Darien Rowayton Bank, does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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