With college tuition fees continuing to outperform inflation, college students are starting to rely more greatly on college loans to pay for their education, with most students leaving college with at least $30,000 of student loan debt. However at the end of the day the interest you pay on these loans are a write-off. And you don’t even need to itemize these deductions to write-off the interest, you can simply use the adjustment to income on Line 33 of Form 1040, which will reduce your overall taxable income.
Of course like everything else the government has their hands in there are certain requirements for you to take this write-off or we should say the deduction for instance;
- You cannot take the write-off/deduction if you are married but filing separately;
- No one else can claim you as an exemption on his or her income tax return;
- You are legally obligated to pay interest on a qualified student loan;
- You paid the interest on the qualified student loan.
These IRS rules get much more complicated as your circumstances change, such as losing your job and you can’t make your payments.
If this happens to you your lender may decide to let you off the hook for the loan balance and if so then you would have to pay income taxes on it. Obviously, if you file bankruptcy or you can prove ruin, you probably could exclude it from your income, but unfortunately it doesn’t always work.
Earlier this year, the Pay as You Earn Program began to give an estimated additional 5 million borrowers who have owed on student loans for 20 years or more and demonstrated good repayment habits a break on repayment if they are currently underwater. This is debt that will be charged off resulting in potential tax problems for the debtors.
With the total level of outstanding student debt topping $1 trillion, the balances being discharged can be huge, which may result in a tax liability well into the thousands of dollars.
On July 29, Reps. Frederica Wilson, (D-FL), and Mark Pocan, (D-WI), both members of the House Education and Workforce Committee, introduced the Relief for Underwater Student Borrowers Act. This bill would allow student loan borrowers who have been granted debt relief as a result of consistent repayment towards their student loan debt an exemption from being taxed on the amount forgiven.
This is good news for student loan borrowers. If they can’t repay the loans, they likely would be unable to pay off the tax liability generated by the discharge of the debt.
According to a statement by on Wilson’s website, “As a member of the Subcommittee on Higher Education and Workforce Training, college affordability is one of my top priorities. Today, student debt is at a record high, with individual debt forcing many people to put off major purchases such as buying a home or automobile… This bill prevents student loan borrowers from being hit with an additional tax burden for debt that has been forgiven after 20 years of consistent repayment, and in the event of suffering a total permanent disability or death, this bill prevents the debt forgiven from being considered taxable income. The Relief for Underwater Student Borrowers Act helps individual borrowers and their families, as well as strengthens the economy.”
We found a lot of information on this subject at www.helpwithmystudentloan.com and suggest you read about the many options available to you.