Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.
Question: I have a client with a substantial amount of student loan debt. I’ve heard that these types of loans can be forgiven after 20 or 25 years. Can you explain this a little further?
Answer: There are three repayment programs that offer loan forgiveness, each with similarities and differences:
Pay as You Earn (PYE) Plan
- Income-Based Repayment (IBR) Plan
- Income-Contingent Repayment (ICR) Plan
The PYE plan offers loan forgiveness after 20 years if your client makes the equivalent of 240 qualifying monthly payments. The IRB and ICR plans both offer forgiveness after 25 years as long as your client makes the equivalent of 300 qualifying monthly payments.
These plans are primarily for individuals who cannot afford to pay their student loans based on a fixed or determinable repayment plan, so there are income and other requirements that must be met in order to become eligible. To get a better understanding of the requirements, please visit http://myfedloan.org/billing-payment/payment-plans/index.shtml and http://studentaid.ed.gov/repay-loans/understand/plans. If your client has any questions about her eligibility, she should contact her loan servicer.
If her loan is forgiven based on the 20 or 25 year plan, the amount of the forgiven loan is treated as cancelation of debt income and is subject to ordinary income taxes. For example, if, in 20 years, $40,000 of outstanding student loan is forgiven, she will have $40,000 in gross income.
If your client has a job in the public service sector (e.g., for a federal state, or local government agency, or a Section 501(c)(3) organization), she may be eligible for the Public Service Loan Forgiveness (PSLF) Program, which forgives the unpaid balance in only 10 years. There are multiple requirements for this plan, so please visit http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service for more information.
Unlike the other debt forgiveness, if your client has her loan forgiven on the 10-year forgiveness plan, the amount forgiven is not included in gross income.
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