ABA Journal reports that even if students start paying back immediately, the cost of an education can nearly double. With a repayment schedule of 20 years, interest on a $40,000 loan can easily reach $30,000, even with a moderate interest rate. At the end of the term, it’s not unlikely that you’ll have paid nearly as much in interest as you have in principal – assuming you can afford it. If you can’t, and you qualify for one of these federal programs for forgiveness, you’ll have the remainder written off. Sort of. That remainder would be subject to tax – at your then marginal tax rate. That means that you could replace one bill (student loan debt) with another (tax debt).
While they are current on their debt and maintaining their good credit with the help of programs that often determine monthly payments based on their income, tax law requires the forgiven loan balance to be treated as income and taxed accordingly, the New York Times reports. The expectation is that such debt will be paid immediately, the newspaper notes. Meanwhile, it is entirely possible, for many such borrowers, that the principal balance at that point could exceed the total original amount of the debt. Depending on the individual’s then-‐ current income tax bracket that could mean a $10,000 tax bill for a person who has a $40,000