You’ve finally gotten those old federal student loans discharged and now have some breathing room to pay down bills, perhaps put aside some money for retirement or begin building a college fund for your kids. Before you start spending your now free cash though, have you received your new tax bill? If not, there’s a Form 1099-C somewhere in the system waiting for you.
Improving But Miles To Go
Previously, the Education Department had what could only be called a broken system for loan holders trying to discharge their debt; it was particularly onerous for disabled borrowers. The Department has made improvements since then and more are currently working their way through Congress. It’s excellent timing for needy families. In 2008, the number of loans discharged because of what can be determined as a permanent disability was 15,000. This increased by a factor of four to 61,600 in 2011. That number nearly doubled to over 115,700 just last year.
Many people are now able to legitimately discharge their loans, but are unprepared for what happens next. Anyone considering loan discharge has to know that these amounts are still considered taxable income for the year the process has been completed. According to a story in the New York Times, one family found themselves hit with a $59,000 tax bill almost immediately after clearing an over $150,000 student loan debt that covered three college degrees. In this case, it was a disability discharge that stopped a man from working further to continue paying off loans he had been in good standing with for many years.
The Taxman Does Not Forgive But He Does Reduce
The IRS cannot forgive the full amount under current law, but the agency will reduce the tax burden for borrowers who can prove that they are still being crushed by debt, even if it is a much smaller amount compared to the original student loan. However, the formula for calculating disability tax relief is probably more difficult than getting student loans discharged for disability. As Mark Kantrowitz, publisher of Edvisors put it, “The government gives with one hand, while taking back with the other.”
Fortunately for the borrower, this process isn’t immediate. First, the IRS will send out a bill. A fast response to this is the best one. If the person ignores it, hoping to put it off until their economic situation improves, all they are doing is ensuring a difficult time later. After one or two more notices, a final bill will be sent out demanding payment. This states the amount owed, that the recipient has 30 days to comply and their right to file an appeal.
For people who can’t pay the bill at once, there are options. If the tax bill is less than $50,000, a former loan holder can file a Form 9465 or apply online to begin a monthly payment agreement. For a bill $50,000 or higher, filing the Form 9465 is the only option to apply for a monthly plan. If the person can pay a large percentage of the loan at once, then he may be able to convince the IRS to accept this amount as an “offer in compromise”.
If a former loan holder can prove that her monthly income is exhausted by basic living expenses, then the IRS can declare that the debt is “currently not collectible” and will stop the collection process until the person’s financial situation changes. Details on these and other options can be reviewed at the IRS website. To take full advantage of each option or to file an appeal, anyone should respond immediately to that first letter.
Income Based Repayment May Be A Better Solution
An option that may benefit you more than the disability discharge, is to apply for an income-based repayment plan. If you are legitimately disabled and would qualify for the disability discharge, then you would also very likely qualify for an income based payment of $0.00 per month. This payment of $0.00 would last indefinitely so long as you are unemployed with a minimal adjusted gross income on your tax returns. After 30 years of making zero payments, your loan would be discharged and you would still have a tax bill, but that bill would not arrive until after the thirty years is complete.
If the cost of carrying these loans has created a burden on your family, discharging them is a viable option despite the eventual tax bill. Understanding the process and the financial consequences of using this method is the key to making it a success. Please contact us here at for the best advice available and to determine if this is a good option for you.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
SoFi: Fixed rates from 3.890% APR to 8.074% APR (with AutoPay). Variable rates from 2.550% APR to 7.115% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.550% APR assumes current 1 month LIBOR rate of 2.50% plus 0.04% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.