There's a huge catch if the federal government forgives your student debt

pulse

March 10, 2017 6:56 PM

The US government will still tax you on the debt it canceled, and it can lead to tens of thousands of dollars you need to pay off immediately.

The debt that is canceled is still taxable and can be an enormous burden.

Student-loan debt in the US has grown to a staggering $1.3 trillion, and the average 2016 graduate will have to repay more than $37,000.

The US government touts its income-driven repayment plans as the solution for managing debt if you don't have a high-paying job. These plans allow you to pay 10% to 15% of your discretionary income and have your debt forgiven after 20 to 25 years (depending on the plan).

That all sounds great, but there is one major catch: The debt that is canceled is still taxable and can be an enormous burden.

Student-loan experts want to get this message out.

"Be forewarned and prepared that under current law that canceled amount is taxable under income to you," Heather Jarvis, a student-loan expert who advises people on how to manage their debt, told Vice.

Students who think they will be able to wash their hands of student-loan payments once the government cancels the remaining balance may be surprised by how much they'll have to pay in taxes.

The Office of Management and Budget, an office within the Executive Branch of the US government, attempted to quantify the impact to students, according to a 2012 article in The New York Times. The OMB figured out that borrowers with a beginning average loan balance of $39,500 would end up having more than $41,000 forgiven, according to The Times. (That's most likely because of interest.)

This could result in a tax bill of $10,000 or more, according to The Times.

That message seems to get lost on student borrowers and contributes to frustration among borrowers and loan experts alike. "One of the things that's super frustrating is that the student-loan scheme is extremely complicated and convoluted and tricky to navigate, even for sophisticated and educated borrowers," Jarvis said.

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