Beware of Student Loan Relief – A big tax bill may be coming

The recent student loan reforms have provided much needed relief to millions of borrowers by making monthly payments more affordable.  However, there is a HUGE tax problem that may leave you a lot more broke in just a few years.

Let’s face it going to school is expensive, and without some sort of government backed assistance to help offset the costs of going to school, I have calculated through super scientific logic and higher order math that just 6 people per year would be able to get a college education or advance degree. Well at least it seems that way.

Seriously though, student loans and government programs are vital and necessary to providing access to advanced education, and without this advanced schooling we as a country would fall even further behind in the knowledge-based global economy. The problem however, is that the cost of tuition and other school related costs means most students graduate having enormous debt loads reaching into the six-figure range only to find that available jobs do not pay enough to cover the cost of living and the cost of repaying these debts.

While the argument can and should be made that the cost of education, imperative to remain competitive in today’s work-place and to keep the country in an advantageous position, must be lowered or alternatively funded, that is a discussion for another day.

In recognition of the dilemma that is faced by the millions of graduates who are in this situation, the government has crafted a number of relief options.  One of those options is the newly expanded income-based repayment program.  Basically, the program (Income Based Repayment Plan) allows you to repay what you can afford to pay for a number of years, based on your income, and that at the conclusion of the repayment period the remainder of your loan is forgiven. 

While this is a tremendous step forward, there is one glaring problem. According to current tax code, when, in 10-15 years, the remainder of the loan is forgiven, the total of the amount forgiven is considered taxable income that is due immediately.  Ron Lieber from the New York Times has written about this problem on Yahoo indicating,

For many people, especially those who finished graduate or professional school with six figures of debt, the tax bill could be well into the five figures. And when it comes, you are supposed to pay in full, immediately.

Read the full column here.

While it is estimated that as of October 31st only 2 million people have applied for the Income Based Repayment Plan (IBRP), looking out further it becomes an even greater issue.  In 2011-2012 more than 10 million people had taken advantage of federal student loan programs, and the need for federal help continues to increase exponentially along with the cost of schooling.

This increase in the number of borrowers who are going to be saddled with student loan debt that cannot be repaid but for such programs as the IBRP, means that we are looking at a tax problem that will affect possibly tens of millions over the next 10-15 years.

While there is a small amount of bantering regarding reforming the tax code to allow for this type of loan forgiveness to become a tax-free occurrence, it is not currently at the forefront of discussion.  But you can bet it will be in the upcoming years as these tax bills become due, and nobody has the resources to pay them.

What’s your opinion? Do you think that making forgiven loans tax free is a good idea? Should we make higher education another federally subsidized institution granting free or significantly reduced tuition?  Is it even fair to offer student loan relief in the first place?

This is a thorny topic with an almost infinite number of arguments and branches of arguments.  Let’s get the discussion started below and vett the possible solutions.

Image By: Thirty30 Photography

About Anthony Candella

Anthony is the founder and Directing Attorney of YourCreditAttorney.com and has been helping consumers just like you understand and improve your credit and financial situation since 2003.

  • Boi

    To me it would make sense to use logic. If all these students have personal debt it will affect the economy no? Also education is education as long as you learn the right material, it matters little where as long as it gets done well. So making education Federal might not be such a bad thing especially because tuitions are going through the roof in our crappy economy which doesn’t make sense to me.