Here’s When You’ll Owe Taxes on Forgiven Student Loans (& When You Won’t)

Student loan forgiveness sounds like a great option, but it could lead to an unpleasant surprise at tax time.

If you’re facing a hefty student loan balance, then you may have already considered pursuing student loan forgiveness to avoid repaying your loans.

But you might not know: Student loan forgiveness is often taxable.

These taxes can create huge hidden costs when the forgiven amount gets added to your tax bill.

Here’s what you should know about student loan forgiveness and taxes before you’re surprised with a tax bill.

You Could Be Hit With a Tax Bill

For many borrowers, income-driven repayment plans, such as Pay As You Earn, coupled with student loan forgiveness, can be financial saviors. These repayment plans cap your student loan payments each month at 10% to 15% of your income.

After some period—usually 20 to 25 years—of steady repayment, your remaining balance is forgiven.

However, there is an important factor to consider: Under current IRS rules, any loans forgiven under these programs are considered taxable income.

This means you could face a hefty tax bill when your loans are forgiven.

Let’s say that after making payments under an income-driven repayment plan for 25 years, you’re left with $40,000 in debt, which is forgiven. That $40,000 becomes taxable income.

In this case, your lender would send both you and the IRS a 1099-C form with the amount of debt forgiven—the same amount you’ll use when completing the necessary tax forms.

So while you might no longer have to pay back $40,000 in student loans, you’ll instead owe a big tax bill. That $40,000 in loan forgiveness could mean a $10,000-plus federal tax bill, which doesn’t include potential state income taxes.

If you can’t pay the tax bill, you could be forced to set up a payment plan with the IRS to resolve your tax debt. If you don’t take any action, you could face a penalty and have to pay interest on this debt.

And you thought your student lender was tough — imagine dealing with the IRS.

Possible Changes to the Current Tax Law

Lawmakers have discussed changing tax laws to get rid of the prospect of paying massive tax bills on student loans. Last year, U.S. Reps. Mark Pocan and Frederica Wilson introduced the Relief for Underwater Student Borrowers Act.

This act would exempt student loan borrowers in good standing with their repayment from being taxed on their forgiven loans.

Currently, only borrowers who qualify for forgiveness as a result of their jobs (e.g. teacher loan forgiveness or public service student loan forgiveness) are exempt from being taxed.

Pocan said the bill is important because it “closes a major gap in our tax code which penalizes some borrowers who have been granted debt relief after at least 20 years of consistent repayment towards their student loan debt.”

However, the bill has made little headway in Congress. Meanwhile, the student loan crisis continues to affect borrowers.

In the absence of a legislative fix, some borrowers can claim insolvency to avoid paying taxes on forgiveness. However, this likely only applies to a portion of borrowers who receive student loan forgiveness.

The laws may yet change as more people start to have their loans forgiven.

In the meantime, it’s crucial to understand the current tax law so that you can avoid unpleasant surprises in the future.

It’s also a good idea to see how your student loan is affecting your credit score. If you’re paying them back on time, it’s a way to boost your scores while you’re young. You can check two of your scores free, updated every 14 days, on Credit.com.

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The post Here’s When You’ll Owe Taxes on Forgiven Student Loans (& When You Won’t) appeared first on Credit.com.

This For-Profit School Is Forgiving $23.5 Million in Student Loan Debt

A for-profit school that allegedly told students their loans would only cost $25 per month to repay must now forgive those loans, federal regulators announced Monday. The firm, publicly-traded Bridgepoint Education Inc., has agreed to discharge all outstanding private loans and refund some students after allegations that it engaged in unfair or deceptive practices, the Consumer Financial Protection Bureau announced Monday.

San Diego-based Bridgepoint currently has nearly 50,000 students, mostly enrolled online in schools it owns named Ashford University or the University of the Rockies. From 2009 to the present, the CFPB says students were encouraged to borrow money directly from the school to attend classes, and were told in some cases their loan payments would be as little as $25 per month.

“Bridgepoint deceived its students into taking out loans that cost more than advertised, and so we are ordering full relief of all loans made by the school,” said CFPB Director Richard Cordray. “Together with our state partners, we will continue to be vigilant in rooting out illegal practices facing student borrowers in the for-profit space.”

The settlement requires Bridgepoint forgive $18.5 million in outstanding loans and refund more than $5 million in loan payments that students have already made. The loans cover students enrolled from 2009 to 2015. Bridgepoint will also pay an $8 million penalty.

The CFPB has been more aggressive in its focus on for-profit colleges lately. It sued ITT Tech’s parent in February; ITT Education Services announced it was shutting down last week after the Department of Education said it could no longer enroll students receiving federal aid.

The CFPB also sued Corinthian Colleges in 2014, eventually winning a $530 million default judgment against the firm.

The CFPB’s Bridgepoint announcement focuses specifically on the school’s sales tactics.

“The Bureau found that the school deceived its students about the total cost of the loans by telling students the wrong monthly repayment amount. As a result, students at Bridgepoint were deceived into taking out loans without knowing the true cost, and were obligated to make payments greater than what they were promised,” the agency said in a press release. “Specifically, the CFPB found that Bridgepoint told students that borrowers normally paid off loans made by the school with monthly payments of as little as $25, an amount that was not realistic.”

Bridgepoint pointed reporters to a statement about the consent order posted on its website. In it, the firm said the refunds and forgiveness impact 1,277 students. The statement notes that the CFPB identified “only one area of concern with the loan program,” and that the CFPB did not raise questions about the firm’s educational credibility. The firm says the associated loan programs have been discontinued.

“This agreement simply allows us to return our full and undivided focus to our students and their success. We believe in the high quality of education our institutions provide and we will continue helping students achieve their goals of a quality and affordable college education,” said Andrew Clark, president and chief executive officer of Bridgepoint Education, in the statement.

The CFPB has also ordered Bridgepoint to remove negative information about its loans from borrowers’ credit reports, and to create a new financial and disclosure tool that makes it easier for students to understand their obligations when they borrow to attend the school. Students will be required to use the tool before enrolling.

Remember, student loan debt — and any associated missed payments — can hurt your credit. You can see how your students loans may be affecting you by pulling your credit reports for free each year at AnnualCreditReport.com and viewing two of your credit scores, updated every 14 days, for free on Credit.com.

Image: DeanDrobot

The post This For-Profit School Is Forgiving $23.5 Million in Student Loan Debt appeared first on Credit.com.

This For-Profit School Is Forgiving $23.5 Million in Student Loan Debt

A for-profit school that allegedly told students their loans would only cost $25 per month to repay must now forgive those loans, federal regulators announced Monday. The firm, publicly-traded Bridgepoint Education Inc., has agreed to discharge all outstanding private loans and refund some students after allegations that it engaged in unfair or deceptive practices, the Consumer Financial Protection Bureau announced Monday.

San Diego-based Bridgepoint currently has nearly 50,000 students, mostly enrolled online in schools it owns named Ashford University or the University of the Rockies. From 2009 to the present, the CFPB says students were encouraged to borrow money directly from the school to attend classes, and were told in some cases their loan payments would be as little as $25 per month.

“Bridgepoint deceived its students into taking out loans that cost more than advertised, and so we are ordering full relief of all loans made by the school,” said CFPB Director Richard Cordray. “Together with our state partners, we will continue to be vigilant in rooting out illegal practices facing student borrowers in the for-profit space.”

The settlement requires Bridgepoint forgive $18.5 million in outstanding loans and refund more than $5 million in loan payments that students have already made. The loans cover students enrolled from 2009 to 2015. Bridgepoint will also pay an $8 million penalty.

The CFPB has been more aggressive in its focus on for-profit colleges lately. It sued ITT Tech’s parent in February; ITT Education Services announced it was shutting down last week after the Department of Education said it could no longer enroll students receiving federal aid.

The CFPB also sued Corinthian Colleges in 2014, eventually winning a $530 million default judgment against the firm.

The CFPB’s Bridgepoint announcement focuses specifically on the school’s sales tactics.

“The Bureau found that the school deceived its students about the total cost of the loans by telling students the wrong monthly repayment amount. As a result, students at Bridgepoint were deceived into taking out loans without knowing the true cost, and were obligated to make payments greater than what they were promised,” the agency said in a press release. “Specifically, the CFPB found that Bridgepoint told students that borrowers normally paid off loans made by the school with monthly payments of as little as $25, an amount that was not realistic.”

Bridgepoint pointed reporters to a statement about the consent order posted on its website. In it, the firm said the refunds and forgiveness impact 1,277 students. The statement notes that the CFPB identified “only one area of concern with the loan program,” and that the CFPB did not raise questions about the firm’s educational credibility. The firm says the associated loan programs have been discontinued.

“This agreement simply allows us to return our full and undivided focus to our students and their success. We believe in the high quality of education our institutions provide and we will continue helping students achieve their goals of a quality and affordable college education,” said Andrew Clark, president and chief executive officer of Bridgepoint Education, in the statement.

The CFPB has also ordered Bridgepoint to remove negative information about its loans from borrowers’ credit reports, and to create a new financial and disclosure tool that makes it easier for students to understand their obligations when they borrow to attend the school. Students will be required to use the tool before enrolling.

Remember, student loan debt — and any associated missed payments — can hurt your credit. You can see how your students loans may be affecting you by pulling your credit reports for free each year at AnnualCreditReport.com and viewing two of your credit scores, updated every 14 days, for free on Credit.com.

Image: DeanDrobot

The post This For-Profit School Is Forgiving $23.5 Million in Student Loan Debt appeared first on Credit.com.