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How Can I Avoid a Big Tax Bill in 25 Years on Forgiven Federal Student Loans?

Question:

Dear Steve,

I am paying the minimal payment for the REPAYE payment plan to the federal government. My yearly pay is merely 12 K per year. My debt is 100 K with all of the interest added. If my student debt should be erased in 27 years, how will that impact my taxes when the chances are that I will have a yearly earning of only 23 K from social security.

How will the government deduct interest on a forgiven loan from my social security once my REPAYE plan comes to an end? Will the debt forgiven by the government be taxed? How does that work? My loans are federal loans.

Lara

Answer:

Dear Lara,

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

You ask an excellent question. The only factual answer is there is no clear answer.

It is impossible to make any concrete determination how the U.S. government is going to deal with waves of tax forgiveness about three decades from now.

As it stands right now, if your debt was forgiven it would be treated as income and taxed as such up to the point your are insolvent.

Recently I posted this article about a military veteran who had his student loans forgiven and subsequently received a big tax bill. So clearly logic and reality and not running in the same circles.

The only path you can follow is to hope Congress will pass a law to make the forgiven student loan debt not a taxable event and/or the IRS will continue to not count forgiven debt above the amount it exceeds your assets, not a liability.

You should continue to make sure you remain on an income driven repayment plan and not get kicked off by missing your annual certification requirements. And then we will have to revisit this situation in another 25 years.


Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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