The student loan debt problem is a huge worry that many students have. In fact, a graduate student by the name of Michael Hulshof is learning the hard way that student loans are not as nice as they once looked. In fact, Hulshof is an attorney and makes roughly $90,000 per year, which requires him to make a payment of $575 per month towards his student loans on an income-based repayment plan.
When he first graduated in 2012, he had a loan debt amount of $145,000 and now, in 2016, that amount has grown to about $220,000 and he plans for it to rise to as much as $400,000 by the time he is 55, which is in just 22 years. His individual loans range in interest from 6.5 to 8.5 percent and accrue $1,500 in interest PER month.
One of his options is to make enough payments and then have the loan amount forgiven after 25 years, but then, the amount forgiven will be factored in as income on his taxes and he could end up owing as much as $175,000 in taxes at that point.
It is a depressing cloud that haunts many students and most of them do not know what they are getting into when they apply and receive loans. When the income-based repayment option was first introduced in 1994, it was not as readily used as it is today. In fact, the number of students using it skyrocketed between 2009 and now. As of Sept. 30, 2015, there were a total of 4.2 million student loan borrowers in an income-based plan.
The income-based plans are a great option for students who cannot afford their monthly payments or the standard 10-year repayment plan, but, with the soaring tax bill that comes along with the loans when the repayment ends, it makes it difficult for students to ever see a light at the end of the tunnel.
Representative Jim McDermott from Washington has stated that he does not believe it is fair to place such a huge tax bill on families once they are finally done playing by the rules and meeting all of the requirements to have their loans forgiven. It is simply wrong according to him.
McDermott and Obama have tried to pass legislation that would keep the forgiven debt from the student’s tax bill, but it has yet to be passed and it is unknown if it will ever pass. However, if it does pass, many students will feel relief. While over 90 percent of student loan borrowers should pay attention to these developments, it should be noted that private loan borrowers aren’t going to be affected by the forgiven debt tax bill. For such loans, no forgiveness program is offered at all by private banks and organizations.
New bills and legislature are currently in the works and hopefully something will be done about it. In fact, the first round of loan forgiveness to come according to the income-driven repayment plans would be in 2019, if any students in 1994 opted for the plan. But, what happens when the student is faced with a large tax bill and cannot pay? Will the IRS go after them or let it slide? We will just have to sit tight and hope that a new bill gets passed soon.