Kevin P. Casey for The New York Times Stephanie Day worries about paying taxes on the portion of her student loan debt that is forgiven. The Treasury Department taxes such debt as income.

I generally try to stay away from policy debates in my work, but this weekend’s Your Money column begs a tax policy question that will probably affect millions of people someday: If you’re enrolled in the income-based repayment program, where any remaining federal student loan debt gets forgiven after a certain number of years, should you have to pay income taxes on the loan balance that the government dismisses?

The tax rules say yes, though there are exceptions for teachers and people who work in public services jobs. The truly destitute can get a pass on the tax bill, too, as do people who manage (against all odds) to get rid of their student loan debts in bankruptcy court.

Everyone else, however, must pay the taxes and pay quickly, lest they get hit with penalties and interest. Changing the rules would deprive the government of revenue, and legislators might try to take it from some other federal education program. Keeping this tax rule as is, however, means that people who are supposed to be getting a break end up with a single tax bill that could equal years of continued loan payments.

So would you keep the rule? Or change it? Or, as Josh Delisle of New America Foundation has suggested, limit how much graduate and professional students can take out in federal student loans so that the forgiven amounts aren’t likely to be so big in the first place? Doing that might make a change in the tax law more palatable — and inexpensive.

Article source: http://bucks.blogs.nytimes.com/2012/12/14/should-you-have-to-pay-taxes-on-forgiven-student-loan-debt/?partner=rss&emc=rss