The tax consequences of student loan forgiveness
When it comes to student loan forgiveness, there are four income-based student loan repayment options to choose from. They are:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income Based Repayment (IBR)
- Income Contingent Repayment (ICR)
If you make payments on one of these plans for 20-25 years, at the end of that period any remaining balance would be forgiven. But, what are the tax consequences of student loan forgiveness?
First, understand that student loan forgiveness is a taxable benefit. Under the Tax Cuts and Jobs Act (TCJA), in tax years 2018 – 2025 student loan forgiveness is exempt from tax if forgiven due to disability or death.
This article from Student Loan Planner provides a good deal of information on the topic, but here are a few tips:
- The tax you’ll owe on student loan debt forgiveness will probably be six figures.
- You need to save for this tax penalty over time.
- Use indexed funds to help save up for your tax bill
- If you’re broke when you owe the tax bill, there may be options available to eliminate or reduce the tax, but don’t count on it.
For more information on student loan forgiveness and the tax implications, contact a ShindelRock tax professional.