President Obama’s proposed budget for the 2014 fiscal year would prevent the taxation of student debt that is forgiven under federal income-based repayment plans, according to the Institute for College Access and Success.

If the provision is approved, it will come as good news to many college graduates who have been relieved to have more manageable monthly payments under the income-based plan and similar programs, which have recently been expanded by the federal government. While they are benefiting from the program now, though, they may end up with a large tax bill years in the future.

Last year, Ron Lieber wrote a Your Money column about the “tax time bomb” that could face some student loan borrowers who have their federal student loans forgiven under government repayment plans aimed at helping those struggling with high education debt.

The income-based plan uses a formula to calculate the monthly payment, based on your income. Then, after 10 to 25 years, the federal government forgives any remaining balance.

The catch is that you generally have to pay income taxes on any debt that is forgiven, unless you’re in a special program for teachers or those in other public service jobs. Depending on how much debt you have, the bill could be hefty — and it is supposed to be paid in full, immediately, when it comes.

The institute, which promotes affordable education and oversees the Project on Student Debt, supports eliminating the tax bill for those students who qualify for the lower-payment programs. Currently, concern about whether forgiven debt will be taxed in the future may discourage those who need help under income-linked repayment plans from participating, said Lauren Asher, the institute’s president.

She said that it was too soon to say if the provision would prevail, given the unpredictability of federal budget negotiations, but that such a proposal had recently had bipartisan support.

Other student debt items, which include keeping interest rates low on subsidized federal loans, are also up for debate.

Are you in an income-based repayment plan, or one of the related plans that lets you make lower payments based on your income? Are you worried about a potential future tax bill?

Article source: http://bucks.blogs.nytimes.com/2013/04/16/budget-would-eliminate-taxes-on-forgiven-student-debt/?partner=rss&emc=rss