A “student loan forgiveness tax bomb” happens when your loan balance is forgiven and you must pay taxes on that amount. This primarily affects borrowers on income-driven repayment plans who've made reduced payments for years.
Right now, anyone who receives student loan forgiveness between 2021 and 2025 will not have to pay taxes on any amount of student debt forgiveness. PSLF or IDR forgiveness is a potential result for any borrower. However, not all borrowers will reach forgiveness.
One major reason for the significant rise in student debt is that more Americans are borrowing to attend college. The percentage of households with student debt has more than doubled, from 10 percent in 1992 to 21 percent in 2022.
The actual policy is that you should receive a refund for every payment made after the 120th payment (which should be the ``effective'' date of forgiveness), on the *current* loan. (So, if you consolidated less than 10 years/120 payments ago, you're probably out of luck for a refund.)
If you are being handed money from your school, you need to know where it is coming from, because in almost all cases, a refund on a student account is because of an over payment on a loan.
Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
"And if you assume there's a likelihood it's canceled, you're going to be more likely to take out more debt up front. That's going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees."
20% of U.S. adults report having paid off student loan debt. The 5-year annual average student loan debt growth rate is 15%. The average student loan debt growth rate outpaces rising tuition costs by 166.9%. In a single year, 31.5% of undergraduate students accepted federal loans.
If your student loan balance is suddenly showing zero, some of the many reasons could be: Your federal student aid or private student loans were forgiven. You've completed one of the student loan forgiveness programs. You qualify for Public Service Loan Forgiveness (PSLF), or.
In certain situations, you can have your federal student loans forgiven, canceled, or discharged. That means you won't have to pay back some or all of your loan(s). The terms “forgiveness,” “cancellation,” and “discharge” mean essentially the same thing.
1, 2023 to Sept. 30, 2024, would not be considered delinquent or in default. So, if you are currently unable to pay back your federal student loans, it will not impact your ability to receive your tax refund just yet.
When you receive any type of debt forgiveness for more than $600, the creditor is supposed to send you a Form 1099-C. You'll find, in box 2, an amount of tax forgiven, and you need to enter that amount on your tax return marked “other income.” The IRS generally considers forgiven debt as income for tax purposes.
According to the IRS, student loan amounts forgiven under PSLF are not considered income for tax purposes. Learn more about the PSLF process. You won't be taxed by the federal government, but your state may tax you. Any debt forgiven as a result of PSLF won't create a federal tax liability for you.
Canceled debt is taxed at the same rate as ordinary income. As a taxpayer, your tax rate depends on your tax bracket and can range from 10% to 37% depending on your taxable income. For example, if you're in the 15% tax bracket and had $10,000 of debt discharged, you may owe income taxes up to $1,500.
According to a recent Forbes Advisor and Talker Research survey of 2,000 adults, one in three respondents said they regret using student loans to finance their education and would not choose that route again if given the opportunity.
The average debt for a 4-year Bachelor's degree is $35,530. The average 4-year Bachelor's degree debt from a public college is $31,960. 61% of students who completed a Bachelor's degree have received student loans. The average 4-year Bachelor's degree debt from a private for-profit college is $47,730.
As of mid-July 2023, approximately 662,000 borrowers have qualified for forgiveness under the limited PSLF waiver.
It penalizes hard-working Americans
We've already discussed how the poor and working classes are treated unfairly by this plan. But the unfairness extends to many middle class families as well who worked hard to pay off their student loans or their children's student loans.
Some who oppose student loan forgiveness view education as a private commodity that benefits the person who purchases it."
It may take years to reestablish a good credit record. You may not be able to purchase or sell assets such as real estate. Your loan holder can take you to court. You may be charged court costs, collection fees, attorney's fees, and other costs associated with the collection process.
No, a creditor generally cannot collect the debt after it is forgiven and a Form 1099-C has been issued, although creditors may try to collect other debts. It might be best for you to get legal advice in this case.
The IRS has a limited window to collect unpaid taxes — which is generally 10 years from the date the tax debt was assessed. If the IRS cannot collect the full amount within this period, the remaining balance is forgiven. This is known as the "collection statute expiration date" (CSED).