Tag Archives: Student Loans

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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Dealing with Debt

Remember to seek out resources when you are dealing with your New Year resolutions.  If your 2015 goal is to deal with your debt, check out these helpful websites (listed below) and articles that offer a different way of thinking about money.

Mohammad Majd’s Article on CNN Money About Investing

Federal Trade Commission’s Guide on Dealing with Debt

Equal Justice Work’s Student Debt Relief Webinars

Department of Education’s Repaying Your Student Loans Website

National Student Loan Data System’s (NSLDS) Website for accessing a full list of your public, not private, student loans

Free credit reports through AnnualCreditReport.com from Equifax, TransUnion, and Experian (Please note that at the time I did this posting, the AnnualCreditReport.com website was down… hopefully, it will be back up soon.)

Harvard’s Guide and Descriptive Chart to Bar Exam Loans that is helpful for anyone in need of a bar loan

The links I listed above are free.  However, if you are overwhelmed and you would rather pay someone to help you with your debt problems there are two agencies I am aware of that are not scams.

The first agency is Student Loan Giant.  This company helps graduates deal with their student loan debt by either reducing it, consolidating it, or offering debt advice.  If you are eligible for a payment reduction on your loans or loan forgiveness, then they do the paperwork for you for a fee.  The company is based out of Florida, but they help graduates across the nation and in most states.  I heard about this program when I need a bankruptcy consult.  I spoke with one of the masterminds behind Student Loan Giant, Ric Feinberg, who is an expert in bankruptcies.  While he no longer practices law because he fully dedicates his time to assisting graduates with their student loan debt, my conversation with him was very insightful and informative.  I am happy to say this is one of those companies that is not a scam.

The second agency is Valley Credit Repair.  This company helps people repair their credit for a fee.  Kim Carpentier, the owner of Valley Credit Repair, is based out of Andover, Massachusetts, but he deals with debtors across the entire state.  He spoke at a Worcester County Bankruptcy Bar event and he talked about the different ways to repair a person’s bad credit.  Also, this company is not a scam.  So, if you need to repair your credit, he can be a good resource.

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