News on Rules, Debt, and Taxes
Final Regulations from the Department of Education
The Department of Education has released the finalregulations that govern the Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF) programs. Over the summer, many of you joined the call for fair treatment of married borrowers in IBR and timely confirmation of eligibility for PSLF. Unfortunately, the final rules are not a satisfactory response.
Now it's up to Congress to eliminate IBR's "double-counting penalty" for married borrowers. We'll work to make that happen in the coming months and let you know how you can help. As for PSLF, the Department acknowledged the need for more clarity about the process but stopped short of committing to annually certifying eligibility. We'll keep pressing the agency on this issue and make sure the next administration knows it's a priority.
The new rules also include several important clarifications and changes. One is that IBR eligibility will be based on the amount you owed when you first started repayment. This is good news for most borrowers already in repayment, since their original debt level is likely to be higher than whatever they owe when they apply for IBR. However, borrowers whose debt rose while in repayment may not benefit from IBR as much as they hoped. We have already updated the calculator at IBRinfo.org to reflect this clarification and will be making other updates to the site this week. We'll let you know when they are complete.
Will Loan Forgivenessbe Taxed as Income?
We do have some good news for borrowers in public service jobs. The U.S. Department of the Treasury recently determined that debt forgiven through PSLF is not considered taxable income under current law. That means that when you qualify for PSLF, you won't get slapped with a huge tax bill as if you'd won the lottery.
However, the same good news doesn't extend to debt forgiven through IBR. In response, Congressman Sandy Levin (D-MI) is leading a bipartisan effort to ensure that borrowers who qualify for loan forgiveness through IBR (and Income Contingent Repayment) get the same common-sense treatment. Responsible borrowers with modest incomes shouldn't have to pay potentially crippling taxes on forgiven student loans. We'll continue to work on this issue and keep you informed.
(This message was sent to the IBRinfo mailing list on October 27, 2008.)