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There is some relief available for those who have borrowed and are near default: loan forgiveness programs allow certain borrowers to reduce their monthly payments in order to pay what they can afford. The rest of the loan, at the end of the repayment schedule, is forgiven.

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).

There’s a potential “tax time bomb” awaiting those who are current on their student loan debt, in programs that forgive the remaining principal balance of the loan after a period of years usually totaling a decade or two, or even longer.

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
loan balance.