Category Archives: Education

Suffolk Law Admitted Students Reception in DC on 4/13/2017

Suffolk Law alumni are hosting a reception for the newly admitted Suffolk Law students on April 13, 2017 from 5:30 to 7:30pm at Stinson Leonard Street in Washington, DC.  This event is open to Suffolk alumni, current Suffolk students, admitted Suffolk students, and prospective students.  Please RSVP here and hope to see you there!

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Alternative Sentencing: Judge Approves A Punishment of Reading

Five teenagers in Loudoun County were caught and pleaded guilty to vandalizing a historic schoolhouse in Ashburn, Virginia with racist graffiti.  As punishment, the prosecutor compiled a list of books for the teenagers to read and write reports on.  The Virginia judge condoned the sentence and probation agreed to enforce this alternative form of punishment.  The New York Times published an article about this with further details about the sentence, reasons behind this arrangement, and the full list of books approved.  The article is available here.  In addition, Loudoun County’s Attorney’s Office released a press statement available here.

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Bill to Terminate Department of Education

The first question that went through my mind when I saw in the news that there is a bill pending in Congress to terminate the Department of Education:

What will happen to my student loans?

Here is a link to the bill that was introduced by Representative Thomas Massie (R-Kentucky).  The Congress.gov website does not have the text of the bill available yet.  But, a local news outlet reported that this Republican sponsored bill proposes termination of the Department of Education on December 31, 2018.  The article goes further to explain the past history of legislators trying to dismantle the Department of Education with little success.

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Impending Tax Bomb of Student Loans

I posted about this last year, but I think it bears repeating.  Back in 2015, law professor Gregory Crespi coined the term “tax bomb” in reference to student loans.  A “tax bomb” is oftentimes unexpected and seen when a taxpayer has surprise income that will be taxed.  It can blow up a taxpayer’s taxes and result in money owed to the IRS.  This concept of a “tax bomb” is also seen in retirement planning.

In the context of student loans, a “tax bomb” can be when a taxpayer has student loan debt that gets forgiven either through the Public Service Loan Forgiveness Program (PSLF) or Income Based Repayment (IBR).  But, it becomes a bomb when the cancellation of student debt is viewed as income under 26 U.S.C. sec. 108(f) which results in a tax and requires payment to the federal government.  However, in Professor John Brooks’ Tax Notes article, he confirmed that current interpretation allows an exception for PSLF, but not IBR.  This means that if you have student loans forgiven under the PSLF program, then you will presumably not have to pay taxes.  But, if you have student loans forgiven under IBR, then you may be stuck with a tax bill.  The Treasury Department issued guidance on the issue in Rev. Proc. 2015-57.  Brooks’ article does a great job explaining the nuances.  Check it out here.

On a happier note, Senator Bob Menendez (D-NJ), Senator Elizabeth Warren (D-MA), Senator Ron Wyden (D-OR), Senator Debbie Stabenow (D-MI), and Senator Cory Booker (D-NJ) introduced the Student Loan Tax Relief Act which would exclude income created from the cancellation of student debt or student loan forgiveness.  The bill is available here.

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Further Clarification on the Discharge of Student Loans based on Debt Forgiveness

In my last post about a new bill addressing student loan debt forgiveness, I mentioned that student loan debt that is forgiven may be viewed as taxable income.  I wanted to further clarify my earlier statements.  As with most things, there are exceptions.

Generally speaking, debt that is forgiven is typically viewed as income by the IRS and this means that it will be taxed.  Again, this is a very general rule.  But, there are many exceptions to this rule.  For example, from 2007 to 2014, this general rule did not apply to short sales with mortgage debt that is cancelled or forgiven because of the Mortgage Forgiveness Debt Relief Act.

Similarly, with student loans, the specific area in the code that refers to gross income exclusions for student loans is 26 U.S.C. Sec. 108(f).  In addition, the IRS has a publication available here that states if you work for a 501(c)(3) tax-exempt organization for a certain period of time under certain conditions, then your student loan forgiven debt will be discharged and not viewed as gross income.  Within the publication and within the student loan debt forgiveness programs, there are additional parameters that must be met by the borrower (too long to go into for this post, but I can save it for another post if readers are interested in learning more).  But, in short, there is an exception to student loan debt forgiveness taxability.  Additional information about student loan debt forgiveness is available in this other IRS publication on page 4 available here.

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New Bill Addressing the Tax Liability for Student Loan Debt Forgiveness

One of the biggest technicalities to student loan debt forgiveness is the taxability of the forgiven debt.  This means that a person could work in public interest for 10 years or have a low salary for 25 years and get all their consolidated student loan debt forgiven (and have affordable payments through out the repayment period), but the forgiven debt will be treated as taxable income.

Depending on how big that forgiven debt is, the tax liability may be completely unaffordable to the student loan borrower.  Thus, this is one of the big potential flaws or big red flags to student loan debt forgiveness.

Recently, Senator Jeff Merkley (D-Ohio) introduced a bill called the Income-Based Repayment Debt Forgiveness Act.  Most importantly, the Act “would ensure that students are not taxed on debt that is forgiven at the end of this process” under Merkley’s new repayment system.

Merkley goes further to explain that under the Income-Based Repayment Debt Forgiveness Act and his proposed Access to Fair Financial Options for Repaying Debt (AFFORD) Act, there would be a two type repayment system.  The two type system has some similarities to the current student loan loan repayment system and the same premise as an income based repayment plan, but it would get rid of the public service loan forgiveness program and removes some of the other repayment plans.

Merkley describes the AFFORD Act in a press release on August 5, 2015 excerpted below.

“One would be the traditional fixed repayment plan, in which borrowers pay the same amount each month over a set period of time to pay off the full balance and interest on the loan. 

The other would be an income-based repayment plan modeled on the current Pay As You Earn (PAYE) model. Under the PAYE model, the borrower would pay 10% of his or her discretionary income and have any remaining debt forgiven after 20 years.”

The full text of the bill is available here.

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