This is it, people. 2017 is the year.
In October, the first student loans under the Public Service Loan Forgiveness Program will be—well, forgiven. If you’ve been paying faithfully on your loans under this program over the past ten years, it’s an exciting moment.
How Does One Qualify for PSLF?
To enter the PSLF program, you have to work in the public service sector for ten years. You must have Federal Direct student loans that you are repaying through an income-based repayment plan, the official Ten-Year Standard Repayment Plan, or any other federal plan where you’re paying at least as much as you would under the ten-year plan.
You make 120 payments and then, if the program still exists, POOF! The rest of your student loan balance disappears.
Because the program was initiated in 2007, we have not seen this happen for anyone yet. Technically, Congress could, at any time, change their mind and shut the program down. We’re feeling confident, though not certain, that they’ll make good on their word in October, but in coming years it’s anyone’s guess as to whether PSLF will still be around.
What are the tax implications of having your student loans forgiven?
We’re glad you asked. It’s tax season, and while you won’t have to worry about this until next year with PSLF, it’s a smart question to be asking.
Any loan balance forgiven under PSLF will not be taxable as far as the IRS is concerned.
However, there are other programs where a forgiven loan balance would be considered taxable income. You never see the money go into your pocket, but you’re taxed on the fact that you get to keep the money you do have in your wallet instead of giving it to your lender.
What programs would require me to pay taxes?
It’s a good idea to always ask this question before signing up for any student loan forgiveness program. However, there are certain types of programs that tend have taxable forgiveness.
If part of your student loans are being forgiven by a state program, you are far more likely to incur a tax burden. For example, social workers who have lived in New York state for at least a year may be eligible for up to $26,000 in student loan forgiveness via a state-run program.
However, the program notes that you will be issued a 1099, specifically a 1099-C. This document logs the forgiveness as income for IRS purposes.
How do I figure my taxes out when I’ve had student loan debt forgiven?
In most cases, forgiven student loan debt will go under “other income” on your 1040. However, it’s wise to get help on your taxes when they start getting complex. Programs like TurboTax give you guidance, and their chat or phone service is available depending on the level of membership you sign up for.
When in doubt, get the extra help. Each program’s requirements are going to be different, and each state has different tax laws that will potentially differ from federal statutes.