By: Meghan Clancy
A recent report from The Institute for College Access & Success (TICAS) demonstrates how a borrowers’ earnings relative to total student loan debt can result in varying levels of debt-forgiveness under income-driven repayment (IDR) plans. TICAS illustrates these differences using five examples of individual borrowers with varying incomes, total student loan debt, family size, and interest rates. All these factors impact the percentage of a borrower’s loan that is ultimately discharged at the end of their loan repayment period.
It should be noted that under IDR plans, monthly payments are based on individuals’ income relative to their loan amount and number of dependencies. At the end of a 20 or 25 year loan term, all remaining debt is discharged and then treated as taxable income. Over 8 million borrowers manage their student loan debt through IDR plans and under current law, the overall tax liability that results from debt-forgiveness can increase one’s tax burden by as much as 80 percent for that year.
Among the reports findings:
- Recent borrowers enrolled in IDR plans are benefitting from declining student loan interest rates. As less interest accrues, these borrowers will see their balances grow more slowly and ultimately have less debt to forgive at the end of their 20 or 25 year term, resulting in less tax liability.
- Past borrowers experienced higher-interest rates, thus accruing more interest which resulted in higher overall student loan balances. As a result, they were more likely to experience greater tax penalties because they had more student loan debt discharged.
- Many borrowers enrolled in an IDR plan wind up paying more in interest than if they were enrolled in a standard 10-year repayment plan. While their monthly payments are more affordable, they pay over a longer period of time and as a result, pay more overall relative to a standard 10-year repayment plan.
- Most borrowers that utilize IDR plans will repay their loan debt in full, and thus not receive any debt forgiveness or incur any tax liability.
- Individuals who have graduated with a bachelor’s degree, earn at least $36,600, and experience sustained income growth over time, are more likely to pay off the full amount of their student loan debt by the end of their IDR loan term.
- Borrowers with sustained lower incomes post-graduation, or those with highly variable incomes, are more likely to receive some amount of discharge of their student loans at the end of their 20 or 25 year period and then face immediate tax burdens because the debt that is forgiven counts as taxable income.
The findings in this report suggest that while income-driven repayment plans offer more affordable monthly payments, any remaining discharged balances can have significant financial implications in the form of tax liabilities relative to the amount of debt forgiven.
