Paul L. Caron

Sunday, December 16, 2012

NY Times: Should You Have to Pay Taxes on Forgiven Student Loan Debt?

New York Times:

If you’re enrolled in the income-based repayment program, where any remaining federal student loan debt gets forgiven after a certain number of years, should you have to pay income taxes on the loan balance that the government dismisses?

The tax rules say yes, though there are exceptions for teachers and people who work in public services jobs. The truly destitute can get a pass on the tax bill, too, as do people who manage (against all odds) to get rid of their student loan debts in bankruptcy court.

Everyone else, however, must pay the taxes and pay quickly, lest they get hit with penalties and interest. Changing the rules would deprive the government of revenue, and legislators might try to take it from some other federal education program. Keeping this tax rule as is, however, means that people who are supposed to be getting a break end up with a single tax bill that could equal years of continued loan payments.

(Hat Tip:  Bob Kamman, Francine Lipman, Ann Murphy, Mike Talbert.)

Update:  ABA Journal, ‘Tax Time Bomb’ Awaits Student Loan Debtors in Forgiveness Programs

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Posted by: Right Answer | Dec 16, 2012 5:38:56 PM

While some people want free money with no tax effects, responsible people pay back the loans with after-tax dollars. An alternative is to require lenders to take taxes out at the time that draws are made against the loans, but allow a tax deduction when loan amounts are repaid -- like pandering politicans would ever do that.

Posted by: Woody | Dec 16, 2012 8:18:49 AM