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What are the tax implications of student loan forgiveness?

On Behalf of | Dec 15, 2016 | Chapter 7

If you live in Tennessee and are struggling with your finances, student loans may be part of your problem. You may be aware that there are loan forgiveness programs being offered by the federal government that can help alleviate some of that financial burden. However, you may not be aware that the amount of your loan that is forgiven is taxable.

The loan forgiveness program that most people will qualify for is an income-based repayment plan. According to CNBC, your monthly payment will be based on how much income you earn. After a certain amount of time making that monthly payment, usually 20 or 25 years, any remaining balance owed by you will be forgiven. However, that balance is then subject to tax on both the federal and state levels.

You may have also heard about loan forgiveness programs being offered for people who attended for-profit colleges that abruptly closed. Those people will also be facing a tax bill. Currently, taxes are also due on loan amounts that were forgiven due to a person’s death or permanent disability. However, legislation has been proposed to put an end to that practice.

While the amount you end up paying in taxes will likely be much smaller than the debt you owed, it can still be burdensome especially if finances are already tight. Many people turn to the income-based loan forgiveness program in the first place for that very reason. If you cannot pay the entire tax bill off in full, you can request a monthly payment plan from the Internal Revenue Service. This is general information on this topic and should therefore not be considered legal advice.


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