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Will I be Taxed on My Forgiven Student Loan Debt Under IBR or PSLF?

By on June 18, 2018

Question:

Dear Steve,

I graduated from law school in 1995. I owed about $50,000 in student loans. I have been through bankruptcy twice, most recently in 2008. I went through some serious health issues. My loans were not discharged in either proceeding. I am on an income-based repayment plan. I now owe about $180,000. I have been in the IBR for 10 years and have 10 years to go.

I am an elected justice of the peace and city magistrate in a small town in Arizona. I am eligible for public service loan forgiveness in about six years.

Under either plan, I will have in excess of $200,000 forgiven.

Under current views that bankruptcy judges have, is it possible to re-open my 2008 bankruptcy and seek to have the loan discharged?

What tax impact am I facing when the loans are finally forgiven?

Thanks for your time.

X

Answer:

Dear X,

The question about reopening the 2008 bankruptcy is an interesting one. While the reopening of past cases does happen, I have no idea how far back is a reasonable period of time. That is really a better question for a local bankruptcy attorney who is licensed in the state you live in.

If you have been a public service employee for the last ten years you would be eligible now. But it sounds like that have might have only been a position you’ve held for four years.

The Public Service Loan Forgiveness (PSLF) program has not yet discharged any student loans I’m aware of.

Under PSLF your loans should be forgiven after 120 full payments under a qualifying repayment plan which includes all of the income-driven repayment plans like the one you are on. The balance forgiven would be tax-free but if your balance is forgiven under the IBR alone then the forgiven amount would be taxed.

I would encourage you to complete and submit the Employment Certification for Public Service Loan Forgiveness form and if you get a response that your employment qualifies towards forgiveness, never lose that response. Keep it with your other important papers. The Department of Education suggests you submit this annually.

READ  Why Am I Having Such a Hard Time Getting Teacher Loan Forgiveness?

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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.

One Comment

  1. X

    June 18, 2018 at 2:56 pm

    Question asked about PSLF loan forgiveness taxes.

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