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.