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I Am Terrified I May Have to Pay Taxes on My Forgiven Student Loan Debt. – Elizabeth

Written by Steve Rhode

“Dear Steve,

I am 27 years old and have a Master’s Degree in Social Work. All of my loans are government loans (no private loans). I accrued all of my debt (approximately $89,000) in graduate school. As a social worker, I do not make much per year and have consolidated my loans and am on the income-based repayment plan, paying approximately $140/month.

I have never missed a payment. The agency I work for currently is a for-profit agency, so I have been unable to find any assistance programs to help with paying off my loans early.

At this point, it feels that there is no way I could pay off my loans prior to the 25 year mark where my debt will be forgiven. I am comfortable paying each month on the income-based repayment plan and feel I could continue to do this without defaulting on my loans.

However, I am totally terrified of having to pay taxes on the debt that is forgiven at the end of 25 years. Do you have any suggestions? Is there anything else I could be doing at this time to prepare myself or do things differently? Thank you so much!


Dear Elizabeth,

worryAll we can do is deal with the facts at hand and hope Congress implements new ways to handle student loan debt.

Here is what we know for sure. It looks like you are in the most likely program that will benefit you. Thankfully this debt is not private student loan debt and that’s good news. You should be grateful for that.

As it stands now forgiven debt may be taxable but if you are insolvent, meaning your liabilities exceed your assets, the tax may be avoided. Currently there is IRS Form 982 that handles this. See IRS Form 982 is Your Friend if You Got a 1099-C.

We will just have to wait 20 or so years and see what the laws and IRS options are at that time.

READ  Income-Driven Repayment Plans for Distressed Student-Loan Debtors: Not a Silver Bullet for Easing the Student Loan Crisis

I would suggest you just stay aware of options to deal with federal student loans and check in from time to time to see if there are any new programs that may better suit your situation.

Until then, I’d suggest worrying less, if possible, and enjoying the life you’ve got today, more.

Please post your responses and follow-up messages to me on this in the comments section below.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

About the author

Steve Rhode

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.


  • Reverse engineering what she pays on the IBR per month makes me think she is earning somewhere in the mid $40K which is a salary she could also earn at a non-profit with a Masters in Social Work. I say change jobs to a non profit. Still the same payment amount, still the same 120 payment requirement (ten years is better than 25) and the amount forgiven creates NO tax liability as it is deemed as earned by the borrower by contributing to the public good. So in the end she pays back $17K and the rest of the debt is forgiven. Switch jobs and enroll in the program you know is available instead of paying for 20 to 25 years hoping for something else, paying $34K and creating a tax liability on the other $55K because proving to the government that you are insolvent is very difficult. Being bankrupt isn’t enough to prove insolvency.

  • From the way she wrote “the agency I currently work for” I thought it may be the case that she either previously worked for a qualifying non-profit or maybe a government job.

    My larger point was that someone with a large student loan debt should look at PSLF, to see if there is enough benefit to the shorter repayment period and the accompanying tax forgiveness to outweigh what may be a lower income than could be earned in a non-qualifying job.

  • It pays to look into the Public Service Loan Forgiveness, especially for people who are working a job like the Elizabeth. She may, indeed, be in the best program for her situation, but there are two distinct advantages to the PSLF program.

    1. Debt is forgiven after ten years.

    2. No taxes are due on the forgiven balance.

    • Don’t forget she said she worked for a for-profit agency so the time may not count. Based on her description of her employment it would not qualify.

      PSLF is only for:

      A government organization (including a federal, state, local, or tribal organization, agency, or entity; a public child or family service agency; or a tribal college or university);

      A non-profit, tax-exempt organization under section 501(c)(3) of the Internal Revenue Code (includes most not-forprofit private schools, colleges, and universities);

      A private, non-profi t organization (that is not a labor union or a partisan political organization) that provides one or more of the following public services:

      Emergency management
      Military service
      Public safety
      Law enforcement
      Public interest law services
      Early childhood education (including licensed or regulated health care, Head Start, and state-funded pre-kindergarten)
      Public service for individuals with disabilities and the elderly
      Public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations)
      Public education
      Public library services
      School library or other school-based services

      More information about loan forgiveness for social workers can be found at

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