Some Student Loan Balances Might Be Canceled as Result of Federal Income Tax Consequences

Student loan debt may be forgiven or even paid off by an employer in some situations. This report focuses on the federal income tax implications for student loan borrowers who are fortunate enough to experience this. The lucky borrower may be someone you know.

Forgiven debt computation

According to Fox56,  those with starting wages of $20,000 and $30,000 can expect to have their $27,000 debt canceled. Furthermore, on the total forgiven debt of $31,027, the borrower with a $20,000 starting salary would accumulate $19,128 in interest and still pay $6,280 in income tax. With a $30,000 starting salary, the borrower would pay $15,164 in interest over the course of the loan, with only $193 forgiven.

Borrowers on a $40,000 starting salary would pay off their debt in 149 months (approximately 12.4 years), whereas those on a $100,000 starting salary would pay off their debt in 42 months. 

Student debt cancellation

According to one recent estimate, the entire amount of outstanding student loan debt is estimated to be around $1.75 trillion. Federal student loans account for nearly $1.59 trillion of that total. According to the same report, approximately 43.2 million students owe an average of slightly more than $39,000 each, MSN reported. 

Unless a statutory exception exists, the general federal income tax law provides that a taxpayer’s gross income includes cancellation of debt (COD) income. The existence of these exclusions, which can be found in Section 108 of our beloved Internal Revenue Code, is contingent on several variables, including how the loan funds are used and the borrower’s financial status at the time the COD event happens.

One exception is that COD revenue can be excluded if you are insolvent at the time the COD event occurs. COD income from certain forgiven student loans is also excludable, according to another exclusion.

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