Student-Debt Forgiveness Is a Wonderful Boon, Until the IRS Comes Calling

"Students seeking relief on their college and graduate-school debt could be sitting on a hidden tax bomb: Billions of dollars in one-time bills from the Internal Revenue Service for any debt they get forgiven," The Wall Street Journal reports. 

"The tax bills are a feature of the 'income-driven repayment plans' that have been offered by the Education Department since 2007. One version of these plans allows borrowers to set their monthly student-loan payments at 10% of their discretionary income. The balances often grow over time because the payments aren’t big enough to cover accruing interest.

Private-sector workers pay for 20 or 25 years. At the end of that period, any remaining balance would be forgiven. Under federal tax rules, that disappearing debt is considered part of a borrower’s income for that given year, and taxed as such.

Those delayed tax bills are piling up. There are now 7 million borrowers owing $389 billion in income-driven repayment, according to the Education Department. The first borrowers likely won’t have debt expunged until 2027. As enrollment surges, education analysts and student advocates are warning of a potential crisis facing borrowers and the government down the road: huge one-time tax bills that individuals aren’t prepared to pay off.

... The IRS has vast powers to collect taxes, including the placement of liens on individual homes. The government already garnishes Social Security checks and wages for retirees who failed to repay student debt. Student advocates say the practice leaves some seniors with little money to live.

For those borrowers who don’t have enough money to cover tax bills, taxpayers would be on the hook. The IRS would likely be forced to cut deals or write off taxable amounts altogether when borrowers can’t pay, some experts say.

Justin Draeger, head of the National Association of Student Financial Aid Administrators, said when Congress passed the income-driven repayment program, the tax was likely an oversight. He and others say Congress will likely face heavy pressure to remove the tax on student-loan forgiveness once Americans start facing bills from the IRS. That would add potentially tens of billions of dollars in taxpayer costs for the student-loan program."

NASFAA's "Headlines" section highlights media coverage of financial aid to help members stay up to date with the latest news. Inclusion in Today's News does not imply endorsement of the material or guarantee the accuracy of information presented.

 

Publication Date: 6/25/2018

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