Passed by Congress in 1994, income-based student loan repayment programs are meant to help borrowers with low income to debt ratios avoid default. About 4.2 million Americans are using one of the five existing programs, many of which will forgive any remaining debt once the repayment term is complete. Unfortunately, there is a largely undiscussed catch that could result in the need for bankruptcy later in life.
Loan Forgiveness and Your Taxes
Any unforgiven debt is considered income by the Internal Revenue Service (IRS). As such, once a student loan is forgiven, it must be claimed as income on your federal tax return. The resulting tax bill, which is dependent upon the amount forgiven, could be financially crushing. Many may be left with no alternative but to file bankruptcy to get out from underneath the cloud of debt left behind after completing the repayment program.
Legislation Still Lacking a Solution
While, clearly, the loan forgiveness and repayment programs offer a solution that works for most, legislators are still lacking a solution for the long-term implications Last year, Representative Jim McDermott introduced a bill last year that would have allowed borrowers to refinance their loans at a lower rate so that repayment programs might help reduce the principal amount or, at the very least, they could file to have their forgiveness exempted, but it was shot down by other lawmakers.
What This Means for Borrowers
In light of this knowledge, borrowers might be tempted to work harder at reducing their student loan debts – maybe through a second job or by paying an amount that exceeds what they can afford. Unfortunately, this does not offer much of a solution either. Only one out of three Americans say they are “happy,” a Harris Poll indicates, and working more has the potential to only further decrease satisfaction.
Instead, experts suggest that borrowers focus on living life and paying their loans according to the repayment plans they already have in place. Many are optimistic that, by the time the massive debt hits most, a solution will be found. It might be a long-shot, but it is certainly better than worrying until then.
Facing Bankruptcy Now? Seek Experienced Legal Help
For some Americans, the issue of bankruptcy is more than simply a future concern; it may be the only solution to their current, mounting debt problems. However, it is important to consider all of your options and, if bankruptcy truly is the right path, you will best be served by the guidance and counsel of a legal professional that is well-versed on bankruptcy laws.
The Law Offices of Eric Zelazny have been helping Illinois residents with debt problems since 1996. Interested in helping you find the right debt solution for you and your family, as both a CPA and an experienced Cook County bankruptcy attorney, Attorney Eric Zelazny provides highly personalized services and creative solutions. To get started, call 708-888-2299 and schedule your free initial consultation today.