Hi Heather,

I have been told that the 25 year IBR will tax as income whatever debt is forgiven.  Has there been any update on this? I’ve heard that many people are demanding that they change this.

Nancy

I also want to know how that tax is calculated. I don’t want to find myself with $30,000 of IRS debt on my hands at the ripe old age of 55.

Current law holds that 25 year IBR forgiveness is taxable as income to the borrower.  I consider this bad policy and legislation has been introduced to fix it, but so far hasn’t gone anywhere.  See more on the tax law on my tools page under Student Loan Laws.

Even if the tax code isn’t amended before the forgiveness occurs (and there is lots of time!), some borrowers may be able to benefit from an “insolvency” exclusion.

As far as how the tax would be calculated, that would depend on your total tax situation including tax rate, exclusions, credits, and deductions.

Hi Heather, can you explain what the “insolvency” exclusion is? I am a student that has accrued a huge amount of student loans and I will qualify for IBR, but my payments each month will most likely not cover the interest (which I know is capitalized unless something triggers it). I am worried that after 25 years, I will end up owing a large tax bill when the forgiveness amount becomes apart of my income. Are there any other solutions for this problem? Thanks.

Sorry, lee8anita, for some reason I didn’t get a notice of this post or if I did it slipped past me.

I’m working with a tax attorney to try to get more info posted for folks interested in this question, but that’s not my area of expertise and I’m not yet sure what to make of it.

Follow up with me in a few weeks to see what I’ve got for you.