March 29, 2024

Bucks Blog: Budget Would Eliminate Taxes on Forgiven Student Debt

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

Bucks Blog: A Student Debt Repayment Option for Some Parents

Parents who take out federal Parent Plus loans to help pay for their children’s college education typically don’t qualify for some breaks available to student borrowers themselves, like repayment options that take their income into account.

But Mark Kantrowitz, a financial aid expert, says there is a workaround available that may help some parents, especially those who are worried about being able to afford their Parent Plus loan payments as the parents near retirement. The approach involves refinancing the loans through a Federal Direct Consolidation Loan, which may make the debt eligible for more flexible repayment options, he wrote this week on his Web site Fastweb.com.

The approach may enable parents to reduce their monthly payments and stretch out the repayment period on the loan. And in some cases, borrowers may even have the debt forgiven.

The option is of interest, Mr. Kantrowitz said, because federal data suggests that some retirees are still paying off education debt, mostly likely loans taken out for their children, rather than for themselves.

Unlike federal loans taken out by students, Parent Plus loans aren’t usually eligible for income-based repayment, a plan that helps reduce payments for students who have low salaries and significant debt by figuring payments based on their income. The parents’ loans are also not eligible for income-contingent repayment, an earlier version of repayment help that’s calculated a bit differently.

But, Parent Plus loans can become eligible for the second version — income-contingent repayment — if they are refinanced into a Federal Direct Consolidation Loan.  The consolidation loan helps the borrower manage debt by refinancing one or more loans into a new loan, resulting in just one, usually lower, monthly payment and extending payment over a longer period of time. (The interest rate on the new loan is based on an average of the rates on the loans that are consolidated, rounded up to the nearest one eighth of a percent.)

The consolidated loan is eligible for income-contingent repayment, which pegs monthly payments to the borrower’s income, family size and total amount borrowed. The consolidated loan can extended for up to 25 years, after which any balance is forgiven. It’s also discharged if the borrower dies.

Further, once the Parent Plus loan is consolidated, it can also benefit from public service forgiveness, a program that erases any remaining federal student debt after 10 years for borrowers who work in the government or the nonprofit sector. This may benefit borrowers who are employed in those areas and who have 10 years until retirement.

In a confusing conflict of rules, Parent Plus loans are technically eligible for public service debt forgiveness even without consolidation, Mr. Kantrowitz wrote. But, in practice, that doesn’t help much. Because the loans are not eligible on their own for income-related repayment plans, the loans are typically repaid over a standard 10-year repayment period, after which there’s no debt left to forgive.

Parent Plus loan borrowers can get information about consolidation loans through their loan’s servicer or from the Web site of the federal Education Department.

A calculator on Finaid.org, a site created by Mr. Kantrowitz, can help compare the difference between a standard repayment option and an income-contingent option.

Are you worried about paying off Parent Plus loans?

Article source: http://bucks.blogs.nytimes.com/2013/04/09/a-student-debt-repayment-option-for-some-parents/?partner=rss&emc=rss