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Author Topic: Loan forgiveness and taxes  (Read 592 times)

needhelp101

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Loan forgiveness and taxes
« on: February 04, 2019, 06:29:49 AM »
I currently have federal loans (undergrad and graduate) that total $144k and am enrolled on an income-based repayment plan. My largest loan is a graduate PLUS loan at $54k - with the congress-set 8.5% interest rate this is rising this total quickly each year. The remaining loans (90k) are a mix of Direct and Stafford Loans ranging from 4.5-6.5% interest. My repayment period started in 2008 and I am estimated to be 40% towards loan forgiveness at the end of 25 years. Due to my lower income, for much of the past 10 years I have most been in forbearance due to heavy debt-to-income load, and if my income remains similar for the next decade, I will likely have a final balance hovering around 500k (!) Not sure if my math is correct on this, but it will be a considerable sum nevertheless.

My question is around the tax burden around loan forgiveness. If I am forgiven these loans due to inability to pay them within the allotted 25 years, will need to pay taxes on the full amount of the loan forgiven? If so, is this expected in a lump sum? Is there a case of someone on these forums who have had their loans forgiven and the IRS then went for other assets to settle the loan (pension, house, etc)? Payment plans? Etc.

Feeling very overwhelmed at the prospect of this hanging over my head of the next 15 years, any advice would be gratefully received.

TheCollegeInvestor

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Re: Loan forgiveness and taxes
« Reply #1 on: February 04, 2019, 10:13:07 AM »
If you stay on an income-driven repayment plan, that is taxable forgiveness (versus PSLF, which is tax free).

Now, a lot can change between now and then, including changing it to be tax free. But as of now, what happens is you get a 1099-C for all the debt that was cancelled, and that is treated like ordinary income. So, you report $500k as ordinary income, which bumps you up to a pretty high tax bracket.

However, not all hope is lost. Most borrowers like you will likely qualify for insolvency - which makes it partially or totally tax free.

Read this: https://thecollegeinvestor.com/22725/student-loan-debt-forgiveness-insolvency/