Will I be taxed on student loan forgiveness from the IBR plan?
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UPDATED: Apr 13, 2012
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While some student loan forgiveness programs exempt forgiven balance from taxable income, the 20-year forgiveness from the Income-Based Repayment (IBR) plan is not one of them. After qualifying for a cancellation of debt, borrowers will find themselves taxed on a “gift” worth the amount of the forgiven balance.
The IRS classifies debt forgiveness as cancellation-of-debt (COD) income. COD income is what our government views as money that an individual shouldn’t actually have, and thus must be taxed on it.
When borrowers receives forgiveness on their student loans, the IRS views all of the principal that was forgiven as COD income, since, under other circumstances, borrowers would have had to repay all of that money. Instead they received what the IRS believes is a “gift.”
However, some student loan forgiveness programs are exempt from the COD income. The most notable of which is the 10-year forgiveness awarded to those who take on careers in the public service sector. The 10-year public service student loan forgiveness is awarded to those enrolled in the IBR plan that make full and on time payments for 10 full years—120 months.
In an attempt to have the 20-year forgiveness opportunity treated with the same respect, Congressman Sandy Levin (D-MI) is leading a bi-partisan effort to persuade the powers that be to change this fact before any IBR participant qualifies for the 20-year cancellation.
The bill sponsored by Levin is H.R. 2492 and it was pitched in 2009. So far it has been endorsed by the Obama Administration, gained 47 cosponsors in the House of Representatives, and has acquired the support of more than 20 higher education institutions, according to The Project on Student Debt.
While there’s still plenty of time—the first students who will reach the full 20 years of full and consistent student loan payments, thus qualifying for forgiveness, won’t complete their requirements until 2027—this will be an important bill to monitor, as it may potentially affect thousands of borrowers.