Bill would ease tax burden of forgiven student loans

Earlier this summer, we wrote about the massive student loan debt many college attendees in Georgia and the rest of the United States are dealing with. In fact, current estimates suggest that roughly 40 million Americans owe about $1.2 trillion for their time in college. On average, college students are graduating with about $30,000 of debt.

We also discussed that while it usually isn’t possible to get student loan debt discharged through bankruptcy (unless severe hardships exist), bankruptcy still might be an effective way for those overburdened by student loan repayments to get rid of other unsecured debt or consolidate their payments.

There are other forms of help available to those struggling with student loan debt as well. The federal “Pay as You Earn Program” was extended to about 5 million additional borrowers earlier this year, which forgives remaining student loan balances after 20 years or more of consistent payments.

But the program comes with a catch: The forgiven debt is treated as taxable income by the IRS so borrowers are then hit with a tax bill that could easily be in the thousands; thereby trading in one form of debt for another.

However, lawmakers from Florida and Wisconsin have introduced a bill in Congress that would exempt borrowers from being taxed on the student loan balances that are forgiven. The theory behind the bill is that if borrowers cannot afford to repay the remaining balance on their student loans, they likely also can’t afford to pay a huge tax burden.

The Relief for Underwater Student Borrowers Act is in its infancy and still has a long way to go before becoming law, but it would be crucial for borrowers who take part in the Pay as You Earn Program. We will keep an eye on the bill’s progress throughout the remainder of the legislative session and report any developments.

Source: Fox Business, “Tax Implications of Student Loan Forgiveness,” Bonnie Lee, Aug. 21, 2014