I'll double post this in two forums for relevance.
This is of particular interest to those who are in college because of student loans or dealing with student loans in America.
There is bipartisan bill in the House of Representatives (HR 2492) that would abolish the tax liability on any student loan "forgiven" as part of any loan forgiveness program under the IBR or ICR repayment programs.
Here is the proposed text:
Quote:
SECTION 1. CERTAIN STUDENT LOANS THE REPAYMENT OF WHICH IS INCOME CONTINGENT OR INCOME BASED.
(a) In General- Paragraph (1) of section 108(f) of the Internal Revenue Code of 1986 is amended by striking ‘any student loan if’ and all that follows and inserting ‘any student loan if--
(A) such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers, or
(B) such discharge was pursuant to subsections (d)(1)(D) and (e)(7) of section 455, or section 493C(b)(7), of the Higher Education Act of 1965 (relating to income contingent and income based repayment, respectively).’.
(b) Effective Date- The amendment made by subsection (a) shall apply to discharges of loans after June 30, 2009
The concept of "loan forgiveness" was simple. The plan was to allow people to have many paths to loan repayment, but there was an option reserved for those who found themselves in economic straits. Rather than go into default, a guaranteed plan was in place for decades...Income Contingent Repayment. ICR capped monthly payments to 20% of a person's disposable income (gross income - poverty level for family size claimed on tax return). This enables a borrower to keep monthly payments manageable, and whatever cannot be repaid after 25 years is "forgiven."
Unfortunately, the IRS treats this "forgiveness" as taxable income. That might not be a problem if it's only a couple thousand dollars, but between the economic crisis (which has been an ongoing issue for over a decade) and the ever increasing cost of education, the odds of someone's forgiveness resulting in a massive tax liability has grown considerably.
IRS debts cannot be absolved in bankruptcy. Bankruptcy courts have set the precedent for allowing student loan discharge when the tax liability from ICR loan forgiveness constitutes an "undue hardship." So, this "loan forgiveness" does not avoid an issue prior changes in the law were invoked to avoid...bankruptcy filings against student loans.
Now that there are programs that provide "loan forgiveness" for people who put in less time (10 years in public service) and are exempt from taxation, it is only fair and equitable to offer that same standard to those under the 25-year program.
Please contact your legislator to support this initiative. If after 25 years of repayment your outstanding balance is to be "forgiven," it's not really forgiveness if the IRS is going to show up at your door and demand a lump-sum payment of whatever the tax rate is on the outstanding balance. This is even more so when you consider many people coming out of college today are between 35-40 and in 25 years, that's 55-60...an age where a sudden tax burden would be crippling if they were unable to pay off their loans after finishing school.
21 Jun 2009, 8:37 am
