It’s that time of year! Tax time is always a stressful time, particularly for student loan borrowers, who already have massive bureaucracies and administrative headaches to contend with on a regular basis. But tax time can also be a useful opportunity for student loan borrowers to take stock of their student debt, their options for managing it, and potential pitfalls to be wary of. Here are some tips for this year as we enter tax season.
Up until 2018, discharges of federal student loans on the basis of the borrower’s total and permanent disability were treated as taxable. In other words, the discharged student loan could be viewed as “income” that the borrower earned during the year in which the debt was cancelled; the borrower would then have to be income taxes on that canceled debt. However, thanks to recent legislation, any federal student loan disability discharges that were granted as of January 1, 2018 should no longer be taxable under federal law.
The current federal tax code permits student loan borrowers to claim a portion of their student loan interest paid during the year as a deduction. If you made any payments on your student loans during 2018, you should received a “1098-E” statement from your student loan lender. The 1098-E will indicate the amount of interest that you paid during the year, and you could get a modest deduction as a result. However, the deduction is capped, and not everyone can benefit from it because it is phased out for higher income earners.
Due to the partial government shutdown, the IRS is working with a significantly reduced staff. While this may not have a direct impact on some student loan borrowers, others may be significantly impacted. In particular, student loan borrowers who need to request a copy of their tax return (or their tax return transcript) in order to apply or re-certify for an income-driven repayment plan may encounter some delays. The online tool that allows borrowers to access their tax information on the U.S. Dept. of Education website also seems to be having issues. Borrowers in these circumstances who have deadlines (particularly those re-certifying for income-driven plans) should allow for plenty of time to account for shutdown-related delays and other snags. Some people may have to submit paper applications with alternative documentation of income (like a pay stub) if they cannot access their tax return or tax transcript.
If you recently got married and you’re making payments on federal student loans, tax filing status as a married couple could make a big difference when it comes to your student loan payments. Several income-driven repayment plans (the Income-Contingent Repayment (ICR) plan, the Income-Based Repayment (IBR) plan, and the Pay As You Earn (PAYE) plan) factor in joint income with your spouse only if you file joint tax returns. However, under the Revised Pay As You Earn (REPAYE) plan, your federal loan servicer will factor in your spouse’s income regardless of how you file your taxes. REPAYE is generally less expensive plan ICR or IBR, but it may actually result in higher payments for some married couples than if they filed taxes separately and selected a different plan. Filing taxes as married-filing-separately, however, could also have tax consequences, including higher taxes for the household. In some cases, a more expensive annual tax bill could wipe out any associated student loan savings.
While marriage can certainly impact your repayment options for federal student loans, the same is true for borrowers who have recently become separated or divorced. For income-driven repayment plans like ICR, IBR, PAYE, and even REPAYE, you may not have to provide your spouse’s income information at all if you recently became separated or cannot otherwise access that information – even if you filed taxes jointly on your last tax return.
For income-driven plans like IBR, PAYE, and REPAYE, student loan payments are usually tied to the borrower’s Adjusted Gross Income (AGI) as shown on the borrower’s federal tax return. A person’s AGI is not their gross salary or gross income; it is inherently “adjusted” to take into account certain pre-tax deductions. AGI can be reduced by contributions to certain retirement accounts or Health Spending Accounts (HSA’s), for instance. Contributing more funds to retirement and HSA’s may be good financial planning in general – but it can also reduce student loan payments under income-driven repayment plans.
The federal government has the authority to intercept federal tax refunds for borrowers who are in default on federal student loans. This tax interception program is known as the “Treasury Offset Program” (“TOP”). The TOP permits the IRS to take your federal tax refund and apply it to your defaulted federal student loan. The only good news is that TOP seizures must be applied only to principal and interest – not to any collections charges or penalties. If you are anticipating receiving a tax refund this year and you are in default on your federal student loans, it may be prudent to cure your student loan defaults first (and there are federal statutory programs that can allow you to do that).
Student loan borrowers can sometimes negotiate settlements for private or federal student loans that are in default. Settlements typically involve a lump-sum payment or series of payments for less than the full balance owed; in exchange, the lender agrees to waive or cancel the remaining portion of the balance. The lender gets a lot money up front, and the borrower doesn’t have to pay the full amount due. However, there is a potential downside to settling: whenever a debt is cancelled (such as through a negotiated settlement), lenders can issue the borrower a “Form 1099-C,” requiring that the borrower report the portion of the debt that was cancelled or waived as “income” for tax purposes. The 1099-C would be issued for the tax year during which the debt was fully or partially forgiven.
By way of example, let’s say that you have a $10,000 loan in default, and you and the lender agree to settle for $6,000. That means $4,000 of that loan balance is being cancelled via the settlement. However, you may get a 1099-C in the mail the following year – and you may have to pay additional taxes as a result. There are sometimes ways of minimizing or even eliminating any resulting tax, however; for example, people who were insolvent at the time that the debt was canceled (meaning their total debts exceeded their assets) may not have to pay any taxes.
Student loan law and tax law are complex, and these issues can be challenging to navigate by yourself. Making a mistake can cost you. Talk to the right professionals so that you get sound advice on how to proceed. That could be an attorney, a financial planner, or a Certified Public Accountant, depending on the specifics of your own unique circumstances. But get your questions answered, and then make the most of your options.
#hardmoneylender #hardmoney #hardmoneyloans #hardmoneyloan #realestate #finance #funding #privatemoney #businessfinancing #businesscapital #commerciallending #residentiallending #realestatefinance #brokers #realtors #investors #homebuyers #homeowners #realestatemarket #housing #housingmarket #mortgagebrokers #celebrityhomes #hardmoneylosangeles #hardmoneycalifornia #fidelityfunding