For many of the millions suffering under financial strain caused by their massive student loan debt balances, the chance at relief brings a welcomed feeling of relief. However, many of those that do seek student loan debt relief are surprised come tax time.
Hidden Liabilities
While you may be familiar with your ability to write off the amount of interest paid towards your student loan debt each year, the tables turn when you receive help with your debt balances. In some instances, having your debt forgiven could lead to an additional tax liability. This is because the IRS views forgiven debts as a form of income, which is thereby taxable. Just like mortgage debt forgiveness and other forms of eliminated debt responsibility, the IRS can require you to account for that amount as income.
However, that isn’t to say that all student loan debt relief results in tax liability or that even having that tax liability is a bad thing. Chances are the amount you will be required to claim as “income” for the forgiven debt is far less than you would have to pay in principal and interest on the original loan balance had it not been forgiven. The important thing is to discuss the potential for tax implications with your student loan lawyer before you agree on any one path for debt relief.