Why Debt, Students and Taxes Matter
One of the happiest and satisfying milestones for a recent graduate or student is paying off
student debt or having their loans forgiven. The joy of this accomplishment leaves little room
for contemplation of the possible pitfalls, especially those related to taxes.
Students tend to be relatively new – and therefore anxious – about filing their taxes, and most have not even considered the effect of paying off their loans on their tax liabilities.Paying off student debt goes hand-in- hand with taxes.
To obtain loan forgiveness, students participate in the government’s Public Service Loan Forgiveness program.
This program requires students to be employed full time at a non-profit or government agency while making 120 on-time loan payments. Forgiven loans have another added tax bonus too – the amount forgiven is not taxed. Those who pay off their taxes are not as lucky in the tax department as their friends in loan forgiveness programs.
Those who pay off their taxes actually will need to pay income taxes on the forgiven amount in the year he or she repays the loan.
What does this mean for students who just successfully paid off their student debt?
They may need to prepare and set aside some funds for a big tax liability. As it stands, the IRS does not have a program for paying off such a tax bill in installments, though some believe a program could be in the works.
Paying off your student debt is a major accomplishment no matter how you do it.
For those who do it outside of a loan forgiveness program, though, it is crucial to understand the tax
liability that can come with it. The best way to do that is to take control of filing your own tax
forms. This can be a daunting task for novice filers but services like those offered by
SimpleForms can help.
Managing your own taxes and tax forms are the natural next step after paying off your student debt.
Written By: Angela Yu, Associate at Connel Foley LLP