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Wed Dec 26, 2012, 10:08 AM

Potential tax bill tied to student loan debt may be ticking bomb

Potential tax bill tied to student loan debt may be ticking bomb

Those breathing a sigh of relief that their student loan payments are now in line with their income may want to reexamine the rules that set the payment in the first place. There could be a tax time bomb looming, slowly ticking away. And defusing it is not a big part of the policy discussion in Washington at the moment.

This potential tax bill is a byproduct of federal efforts, including the newly expanded income-based repayment program, that allow you to limit the monthly payments on most federal loans to what you can afford to pay. There’s a formula that uses your income to determine your payment. Then, the federal government forgives any remaining balance, usually after 10 to 25 years.

The catch comes with the forgiveness, since you generally have to pay income taxes on any forgiven debt (unless you were in a program for teachers or worked in a public service job, in which case the taxes go away). For many people, especially those who finished graduate or professional school with six figures of debt, the tax bill could be well into the five figures. And when it comes, you are supposed to pay in full, immediately.

http://bostonglobe.com/business/2012/12/15/potential-tax-bill-tied-student-loan-debt-may-ticking-bomb/oRSV8O8qaOw3uMEwlRa4kI/story.html

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Reply Potential tax bill tied to student loan debt may be ticking bomb (Original post)
Liberal_in_LA Dec 2012 OP
mythology Dec 2012 #1
Fumesucker Dec 2012 #2
NYC_SKP Dec 2012 #3
exboyfil Dec 2012 #4

Response to Liberal_in_LA (Original post)

Wed Dec 26, 2012, 10:11 AM

1. This is certainly something to be aware of

But that said, I still think on average it's a good thing to do, even if it isn't resolving the underlying issue of the cost of college.

Thanks for sharing this.

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Response to Liberal_in_LA (Original post)

Wed Dec 26, 2012, 10:13 AM

2. The large print giveth

And the small print taketh away.

As it was in the beginning, is now and ever shall be, hypocrisy without end, amen.

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Response to Liberal_in_LA (Original post)

Wed Dec 26, 2012, 10:14 AM

3. Interesting, but forgiven debt on the principal loan is still a pretty sweet deal.

I'd love to have some debt forgiven. That forgiven debt is, basically, free money that somebody is going to pay for somewhere else in the system.

Thank you for bring this to our attention, and I hope those who need to see it do.

Unpaid taxes can add up and with penalties be the financial undoing of well-meaning people.

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Response to NYC_SKP (Reply #3)

Wed Dec 26, 2012, 10:49 AM

4. Which brings a larger societal question

If society is asked to bare the burden of the education through debt forgiveness, then what are we getting for our money. Those degrees that can earn an adequate income in general are not being forgiven. Society does assist in paying or forgiving some student debt (think teachers) as an alternative to higher salary.

I personally think the debt forgiveness will lead to a future starving of federal money for education. This will not impact my children at the undergraduate level, but my younger daughter wants to go to medical school and she must borrow to accomplish that.

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