Student-Debt Forgiveness Is a Wonderful Boon, Until the IRS Comes Calling

Education analysts, student advocates warn of impending crisis from one-time tax bills individuals may not be prepared to pay off

See By Josh Mitchell of The WSJ. Excerpts:

"The tax bills are a feature of the “income-driven repayment plans” that have been offered by the Education Department since 2007. One version of these plans allows borrowers to set their monthly student-loan payments at 10% of their discretionary income. The balances often grow over time because the payments aren’t big enough to cover accruing interest.

Private-sector workers pay for 20 or 25 years. At the end of that period, any remaining balance would be forgiven. Under federal tax rules, that disappearing debt is considered part of a borrower’s income for that given year, and taxed as such.

Those delayed tax bills are piling up. There are now 7 million borrowers owing $389 billion in income-driven repayment, according to the Education Department. The first borrowers likely won’t have debt expunged until 2027. As enrollment surges, education analysts and student advocates are warning of a potential crisis facing borrowers and the government down the road: huge one-time tax bills that individuals aren’t prepared to pay off.

With the inflating tax bills, the plans for some borrowers resemble “balloon payment” plans offered by some mortgage lenders, under which borrowers make low monthly payments for a period and then are required to make a big, one-time payment to pay off the sum. Some policy makers have criticized balloon payments as a form of risky lending."

"Taken altogether, Americans could be on the hook for tens of billions of dollars of one-time taxes down the road."

"borrowers in income-driven repayment plans to have an average of $41,000 forgiven. For borrowers in the 25% tax bracket, that could mean a tax bill of more than $10,000."

"many student-loan borrowers are unaware they will face a big tax bill."

"The government already garnishes Social Security checks and wages for retirees who failed to repay student debt."

"For those borrowers who don’t have enough money to cover tax bills, taxpayers would be on the hook."

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