Academic journal article Journal of Accountancy

Student Loans Can Hold Tax Surprises: Student Loan Forgiveness Programs

Academic journal article Journal of Accountancy

Student Loans Can Hold Tax Surprises: Student Loan Forgiveness Programs

Article excerpt

Due to rising tuition costs, the number and size of student loans have increased dramatically in recent years. Once the exclusive domain of college financial aid offices and hometown banks, education loans are now the subject of cable TV commercials and e-mail solicitations from major credit card companies. Many students run into problems after graduation when loan payments begin. For those students who pursue careers in the high-demand/low-reward public service arena, the repayment problem is especially acute.

Congress has attempted to alleviate this problem by various means, including extending the repayment period for student loans, creating debt forgiveness and debt repayment programs and even providing a tax deduction for the payment of student loan interest. Private-sector employers in high-demand professions have joined in, offering their own student loan repayment plans as a recruitment tool.

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As a result, recent graduates face a bewildering array of options for dealing with the substantial debt they have accumulated. Those who successfully negotiate this maze and find a repayment plan or debt forgiveness plan that meets their needs are often surprised by the income tax consequences of their decisions.

FORGIVENESS PROGRAMS AND TAX CONSEQUENCES

Student loan forgiveness plans fall into three categories. The most important are the federal loan forgiveness provisions connected with the extended loan repayment plans elected by qualifying borrowers who are incapable of paying off their education loans over the typical 10-year period. Second, specialized loan forgiveness and loan repayment programs are available for borrowers who work for certain employers (for example, the Peace Corps, the military, and school districts with a high proportion of low-income or special needs students). …

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