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Income-Based Repayment Can Have the Same Effect as Discharging Student Loans


If you have a federal student loan, and you’re not making enough to pay your loan payments (or you are completely unemployed), you may be looking for relief from your loans. In fact, you may be looking to explore options to discharge your loans in bankruptcy, or, if your unemployment is caused by medical issues, you may be interested in excusing your loan based on disability.

Income-Based Payments

But there is another option that is much easier and quicker to get: Income-based repayment (IBR). This is program allows borrowers to pay as little as $0 per month as a student loan payment. After 25 years, the balance due on your loan is forgiven (which is true in IBR no matter what your monthly payment is).

A $0 payment has the same effect as a discharge from student loans: If you are unable to work for an extended period of time, you will pay the same thing–$0–every month as if your student loans were completely discharged. When you apply for IBR, student loan companies don’t ask what your monthly bills are, or question why you aren’t working, the way a bankruptcy court would.

Filing Taxes When You Apply for IBR

Married people should be aware that if you file taxes jointly, IBR will consider your spouse’s income along with yours. We aren’t a tax law firm and can’t give you advice about the pros and cons of filing taxes jointly (married) vs. as an individual. There are certainly tax benefits to filing as a married couple.

But if those benefits aren’t as significant as the benefits of filing separately and obtaining a more favorable student loan payment, you may want to file separately. The point is that it’s a question you may want to ask your accountant before just assuming you should file taxes jointly.

More Details of the IBR Program

IBR only applies to federal student loans, not private. If you have a mix, you can apply for IBR for just the portion of debt that’s federal.

You will also have to reapply for IBR yearly. Income for the purposes of your IBR payment is based on your tax returns, so any increase in income could raise your payment. The program does allow you to explain if your income is different than what is reflected on your tax returns (for example, if you worked last year, and your taxes show income, but you just lost a job two months ago).

Remember that your loans are completely wiped out after 25 years of payments ($0 counts as a payment) no matter what the balance may be. However, we don’t yet know what the tax consequences of the wipeout will be. Technically, the wiping out of your student loan balance after 25 years qualifies as a discharge of debt, which is considered taxable income by the IRS.

Obviously, it would do little good to go from owing student loan companies to owing the IRS. Taxability will be an issue for Congress when more people start to hit that 25 year mark.

Get help with your student loans and help applying for the available loan relief programs. Contact Jacobs Legal in Miami today to discuss your student loan options.

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