Drowning in student loan debt?
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Can you imagine owing a million dollars or more in student loans? For more than 100 people in the US, it’s a terrible reality as their college debt has mushroomed out of control. Just five years ago, it was less than 15 borrowers who had racked up that much in school debt. So what do you do with more than a million dollars in student loans and not enough money to vanquish your debt?
A million dollars in debt (and climbing)
The Wall Street Journal recently published an article about an orthodontist who owes slightly more than $1 million in school debt. In the profile, he mentioned that the debt is insurmountable despite running a successful practice. There was a tipping point of debt in college where the choice was to press on and finish the medical degree or walk away with no degree and a mountain of student loans.
For many in medical and dental college or law school, there may be similar issues. Leaving school because of high debt could, in fact, leave you in an untenable situation and piling on more debt may be the only way to get through and have a shot at paying your loans. The orthodontist in the article used forbearance and then an income-driven plan (IDP) to lower payments.
The high cost of debt relief
With IDR plans (including income-based repayment, PAYE, and REPAYE), after 20-25 years of lower payments, the remainder of the loan balances are discharged. That seems like a good deal, but the debt relieved becomes taxable income.
Since the orthodontist’s IDR payments don’t cover the interest, his debt grows by a staggering $3k each month. By the time he’s done making payments, he could owe twice as much. When the balances are forgiven, that’s a tax bill that will come due on $2 million of imputed income.
Imputed income is when the IRS treats forgiven debt like a windfall since it’s “found” money because you don’t have to spend to pay back a debt. It seems unfair, but it’s the reality of the tax code. With $2 million tacked onto his income, and a tax bracket of 30-40%, that’s more than $600k the orthodontist will owe the IRS on his forgiven student loans.
So, what do you do with that much student loan debt?
The only way to avoid the tax debt on discharged student loans is to get them forgiven under Public Service Loan Forgiveness (PSLF) or via bankruptcy discharge. Here’s a look at how these options could help you.
For doctors, lawyers, dentists, nurses, teachers and many other professionals, going into the military, government, or another public service is a viable path to discharge student debt. While working in a qualified position, the debtor must make 10 years of on-time consecutive student loan payments and then the remaining balances are discharged. The payments can be under an income-driven repayment plan to make them more affordable and maximize the debt relief you get.
Filing bankruptcy is another option for borrowers that can’t even afford their debt using IDR, IBR, PAYE, or REPAYE programs. If you’re permanently disabled, work in a career where you’ll never earn enough to service your debts, have a chronic illness, or are older, you might qualify for student loan relief in bankruptcy. You must be able to prove “undue hardship” which means that you can’t maintain a decent standard of living while servicing the debt.
Student loan forgiveness under both PSLF and bankruptcy are tax-free, so you won’t be hit with a staggering tax burden that can diminish the impact of student loan discharge. If you’re drowning in student loans, you need a meaningful solution. To find out more, come see a student loan expert at the Law Offices of John T. Orcutt.
Read reviews from satisfied clients and then call +1-919-646-2654 to schedule a free student loan debt consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.