This is the final post for our three part series on common student loan myths. This one deals with the aftermath of loan forgiveness.
What you think happens. You just finished the last of your 25 years for your Income Based Repayment plan or have had your loans forgiven for disability. These loans are now out of your life forever and you don’t have to worry about them ever again.
What actually happens. Or until tax time. While these loans are forgiven, loan discharges that occur due to closed schools, false certifications, unpaid refunds, death or disability are all considered taxable by the IRS. In addition if your loan is discharged from an Income Driven Repayment plan, this is also taxable. What this means is if your taxable income for a year is $20,000.00 and you have $40,000.00 in loans forgiven, your income will show up as $60,000.00. This will result in your owing a higher tax rate on some of your money and overall seeing a sizable bill from the IRS come tax time. Do remember though whatever you do owe (and a tax professional can help you figure this out) it is a drop in the bucket compared to what would have been owed in loan payments.
Where there may be a morsel of truth to this. Some loans are forgiven without this tax hit. Forgiveness programs such as the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs will not tax you for the forgiveness portion of your loan the following tax season. Just one more benefit of helping people!