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‘Tax Time Bomb’ Awaits Student Loan Debtors in Forgiveness Programs

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‘Tax Time Bomb’ Awaits Student Loan Debtors in Forgiveness Programs

Dec 17, 2012, 01:57 pm CDT

There's a potential "tax time bomb" awaiting those who are current on their student loan debt, in programs that forgive the remaining principal balance of the loan after a period of years usually totaling a decade or two, or even longer.

While they are current on their debt and maintaining their good credit with the help of programs that often determine monthly payments based on their income, tax law requires the forgiven loan balance to be treated as income and taxed accordingly, the New York Times (reg. req.) reports.

The expectation is that such debt will be paid immediately, the newspaper notes.

Meanwhile, it is entirely possible, for many such borrowers, that the principal balance at that point could exceed the total original amount of the debt. Depending on the individual's then-current income tax bracket, that could mean a $10,000 tax bill for a person who has a $40,000 loan balance.

Related coverage:

ABAJournal.com: "Son’s Death Leaves Mom with Big Tax Bill on Forgiven Student Loan Debt"

ABAJournal.com: "US Lawmaker Is Crafting Plan to Withhold Student Loan Payments from Paychecks, Just Like Income Tax"

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