Student debt and taxes

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This article in the New York Times addresses the question: If you’re enrolled in the income-based repayment program, where any remaining federal student loan debt gets forgiven after a certain number of years, should you have to pay income taxes on the loan balance that the government dismisses?

There are exceptions, but most folks must pay the taxes and pay on time or get hit with penalties and interest. Unfortunately, this means that even if you get a break on your student loans, you may still have to pay a big chunk of change to Uncle Sam. The same rule applies to any debts that are voluntarily forgiven, they are considered to be income.

Getting your student debt forgiven is no easy task. Bankruptcy can take care of medical and credit card debt, but student loans can follow you forever and are not dischargeable in bankruptcy. Federal bankruptcy law, in an effort to protect taxpayer dollars loaned out to students, requires those who wish to erase that debt to prove that repaying it will cause an “undue hardship”.

Proving hardship requires a separate legal process from standard bankruptcy. You also need a good lawyer on your side. So those mired in student debt should be prepared to pay one way or another: either pay the student loan debt, pay the taxes, or pay a lawyer to help you prove undue hardship and sort out the tax consequences of debt forgiveness.

Sounds confusing? Contact the experts at Cossitt Law. The staff at Cossitt Law is committed to helping clients untangle their most complex debt issues while protecting their best interests. Our extensive bankruptcy experience, spanning four decades, allows us to focus on finding pragmatic, customized and cost effective solutions to our clients’ problems so they can get on with their lives.

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