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New Legislation May Relieve Student Loan Tax Burden

College Planning

Currently, borrowers who have all or part of their student loans forgiven as a part of their income-based repayment plan, income-contingent repayment forgiveness program, or due to disability or death, have to pay taxes on the amount forgiven as if they had received it as income. Many borrowers see this as a win because the amount of taxes they pay is much less than their student loans. It can, however, be a financial burden if the amount written off is significant. If a borrower's taxes reflect an extra $20,000 in income that was in fact debt written off, they will have to pay a much larger amount of tax on their annual return, which can be difficult for some.

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New legislation called the Student Loan Tax Relief Act would change this. If passed, the act would make tax-exempt any forgiven student loan and would apply no matter what the reason for the loan being forgiven. The bill, by Senators Elizabeth Warren and Bob Menendez, aims to help families avoid what they feel is an unfair burden.

The issue gained attention in 2012 when a recent graduate committed suicide and his mother received a tax bill for $14,000 after her son's student loans were forgiven. Many other families have also dealt with this issue. In 2011, the Department of Education forgave $2.7 billion dollars of student loan debt due to bankruptcy, disability, or death.

Find out quickly at what rate you can refinance your student loan.

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