If you’re considering student loan forgiveness to repay your student loan debt you may not have thought about whether that forgiveness comes with a big tax bill. Today’s post gives you the details on which student loan forgiveness options aren’t taxed as income and which option is. Estimated read time ~ 3 min. Estimated watch time at 1.5x speed ~ 2 min.
Public Service Loan Forgiveness (PSLF)
Not taxed as income. The amount of student loan debt forgiven under PSLF doesn’t have a limit and is not taxed as income.
Teacher Loan Forgiveness
Not taxed as income. The amount of student loan debt forgiven under Teacher Loan Forgiveness is limited to either $5,000 or $17,500 depending on the subjects taught and isn’t taxed as income.
Income-driven Loan Forgiveness
Taxed as income. The amount of student loan debt forgiven under Income-driven Loan Forgiveness is taxed as income.
That means, depending on the amount of debt you have forgiven and your income, you could have a tax bill of thousands or tens of thousands of dollars if you get student loans forgiven under this plan.
Here’s a handy Forbes article with the 2018 tax brackets.
How to Plan
If you’re considering PSLF or Teacher Loan Forgiveness, there’s nothing to plan for.
If you’re considering Income-driven Loan Forgiveness you’ll want to talk to a CPA or tax professional to help you plan for the potentially large tax bill.
Before you go talk to them it will be helpful to know about how much student loan debt you expect to have forgiven. You can find that out by using the Student Loan Repayment Estimator on the federal aid website.
If you’re planning on getting Income-driven Loan Forgiveness what is your strategy for managing the tax bill? Let me know in the comments below or on the Repayable Facebook Page.
If you’re considering student loan forgiveness you’ll need to know what the three major federal student loan forgiveness options are. While there are a lot of smaller niche loan forgiveness programs available, these three cover the most common options through the Department of Education.
Estimated read time ~ 5 minutes. Estimated watch time at 1.5x ~ 2.5 minutes.
3. Teacher Loan Forgiveness
What itis: Teacher Loan forgiveness forgives up to $17,500 if a borrower teaches full-time for five complete and consecutive academic years in a low-income school or educational service agency, and meets other qualifications.
Eligible Loans: Federal subsidized and unsubsidized undergraduate loans (both Direct and Stafford). Graduate loans aren’t eligible for Teacher Loan Forgiveness, but if you have a Direct Consolidation Loan the undergraduate portion of that loan is eligible for forgiveness. Only loans made before the end of the five years of qualifying academic service are eligible for forgiveness.
Teach full-time for five academic years. *Note: taking summer break is still considered full-time employment.
Have an outstanding loan balance after Oct 1, 1998.
Loans must be in good standing, not in default.
Forgiveness Amount: Math and science teachers at the secondary level or special education teachers at either the elementary or secondary level are eligible for $17,500 of forgiveness. All other teachers may receive up to $5,000.
2. Income-Driven Loan Forgiveness
Whatit is: Income-Driven Loan Forgiveness forgives a borrowers remaining loan balance after 20 to 25 years of income-driven payments.
Eligible Loans: Determined by which of the four income-driven plans a borrower chooses. Direct loans that don’t include Parent PLUS loans are eligible for all four of the income-driven repayment plans. Direct Consolidation Loans that are used to pay off Parent PLUS loans are only eligible for Income-Contingent Repayment. FFEL loans that haven’t been consolidated to a Direct Loan can be repaid through the Income-Based Repayment Plan.
Eligibility Criteria:Any borrower with a remaining balance who made payments under an income-driven repayment plan for 20-25 years.
Forgiveness Amount: There is no cap on the amount of student loans forgiven. However, the forgiven amount of student loan debt is taxable as income.
1. Public Service Loan Forgiveness (PSLF)
Whatit is: Public Service Loan Forgiveness (PSLF) forgives a borrowers remaining loan balance after 120 payments were made under a qualifying repayment plan while working full-time for an eligible employer.
Eligible Loans: Direct Loans, including Direct Consolidation Loans are the only student loans that are eligible.
Forgiveness Amount: There is no cap on the amount of student loans forgiven.
Are you considering student loan forgiveness under one of these three options? Let me know in the comments below or on the Repayable Facebook Page if you’re planning on getting Teacher Loan Forgiveness, Income-Driven Loan Forgiveness, or Public Service Loan Forgiveness.
Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.
My loan was sold from (Sallie Mae) to a third-party (Navient) that doesn’t seem to have income-based repayment. Are there other options that will allow me to lower my minimum monthly payments?
When your Federal student loans are sold from one servicer (Sallie Mae) to another (Navient), they remain Federal student loans and eligible for all federal student loan benefits including income-driven repayment, unless they’re in default. Navient is another federal student loan servicer.
That’s good news because you have the option to access income-driven repayment plans including the Income Based Repayment plan if your income is low relative to your eligible federal student loan debt.
To get on an income-driven repayment plan you’ll need to complete an application on the Federal Student Aid website. The application is completed through the Dept of Ed not through your specific loan servicer. Here’s the link to the income-driven repayment plan application.
The process is really short and takes 10 minutes or less. It does require you to submit income information but the website is equipped to pull through information from your most recent tax return and it will automatically pull through your federal student loan information.
Public Service Loan Forgiveness (PSLF) is one of the fastest and most complete student loan forgiveness plans offered to federal student loan borrowers. PSLF is also one of the most convoluted loan forgiveness programs. So if you’re considering PSLF you’ll want to stay tuned for the 5 steps you need to take to get PSLF.
Estimated read time ~ 5 minutes. Estimated watch time at 1.5x ~ 4 minutes.
Step 1: Determine if you’re working for an eligible employer.
Employers that are eligible include goverment or tribal organizations and 501(c)3 non-profits. To find a list of PSLF eligible employers check out this link. To be eligible for PSLF you’ll need to be employed full-time as defined by your employer or 30 hours per week, whichever is higher.
Step 2: Determine if you’ve made any eligible payments toward PSLF.
To qualify for PSLF you need to make 120 eligible payments. To know if payments you’ve made are eligible or not you need to know which type of loans you have and what repayment plan you’re in.
Do you have Direct Loans, FFEL loans, or a mix of both?
Which repayment plan are you current on?
FFEL loans aren’t eligible for PSLF. The eligible repayment plans for PSLF are Income-Based Repayment (IBR), Revised Pay as You Earn (REPAYE), Pay as you earn (PAYE), or Income-Contingent Repayment (ICR). The 10 year standard repayment plan is also technically eligible for PSLF but after 120 payments under this plan there isn’t any remaining loan balance to be forgiven.
Step 3: Choose your course of action.
If you haven’t been making eligible payments, either because you have FFEL loans that aren’t eligible, or because you weren’t in the right repayment plan, you’ll need to make some changes.
If you have a significant amount of FFEL loans, you’ll need to apply for a Direct Consolidation Loan to make them eligible for PSLF. Only Direct Loans are eligible for PSLF. Consolidating your student loans restarts the clock on 120 payments for PSLF so be sure this is the best choice for you.
Once you have all Direct Loans, it’s time to enroll in an eligible repayment plan. If you’re a new borrower after Oct 1, 200y the Pay as You Earn (PAYE) plan is generally the most affordable option. If you borrowed before that date the Revised Pay as You Earn (REPAYE) or Income-Based Repayment (IBR) plan may be best, it’s a good idea to compare them using the studentaid.gov calculator. If you’re a parent with a Parent PLUS loan, Income-Contingent Repayment (ICR) is the only repayment plan option that’s eligible for PSLF.
Step 4: Complete and submit the employment certification form.
This form allows you to double check that you’re in eligible employment for PSLF and will speed up the process for loan forgiveness once you’ve made 120 qualifying payments. This step isn’t required but is strongly recommended to make sure your forgiveness goes smoothly after you’ve spent 10 years making eligible payments.
Step 5: Stay on track.
Ever year you’ll need to resubmit your income information to remain on an eligible income-riven repayment plan. Failing to do so means you’ll waste money making ineligible payments or paying a higher monthly payment.
You’ll also want to check your progress with FedLoan Servicing to make sure you’re both recording the same number of eligible payments made toward PSLF and to identify any problems early. Any time you change employers you’ll want to submit the employment certification form. Finally, you’ll need to keep your student loans in good standing by making your payments on time each month.
Are you considering PSLF? Let me know on the Repayable Facebook Page or drop me an email jeni@repayable.org. For bite-sized student loan tips and motivation follow me @therepayable on Instagram.
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