By Victoria Sechrist (ConsumerCatholic.com)
Part 4 of a 5-Part Series on Student Loans
So far, we’ve talked about using prudence and temperance in regards to paying back your student loans. Now, we’re going to tackle fortitude.
In Italian, forte means strong. The virtue of fortitude involves courage and, as the Catechism puts it, “firmness in difficulties and constancy in the pursuit of the good.” Without God we have no strength, and while you can’t arm wrestle your way out of student loans, you can remain firm in the difficulty of paying them off.
In Part 4 of this five-part series (almost to the end!), we’re going to talk about practicing fortitude in paying down student loans.
The Tax Bomb
Income-based repayment programs for Federal student loans are in their infancy, relatively speaking. What many don’t know is that the government has agreed to forgive unpaid balances on undergraduate student loans after 20 years on an income-based program. For graduate loans, it’s 25 years.
For real?! Yes, but with a major caveat. You will be taxed on the amount that is forgiven. So let’s say you’re 5 years into an income-based repayment program. You’ve run the numbers and have determined preliminarily that if you keep on this pace, your balance will balloon to $78,734 by the time you’ve hit 20 years (should the law stand as it is now.)
This is all hypothetical, though. So much could happen between now and then. We won’t see what will happen until later this decade when the first batch of people who’ve been on income-based repayment for a full 20 years will, theoretically, get their balances forgiven and get hit with a tax bill.
In 15 years, if your total income is $100,000 and you get $78,734 of student loans forgiven, then your taxable income for that year is actually $178,734. So yes, it can dramatically change how much you owe in taxes that year. This is something to plan for.
At this point, it might seem like there’s no way out! But there may be justice… stay tuned for next week’s blog!