With college graduates coming out of school with large amounts of student debt looming over them, many have elected to go with an income-based repayment plan to avoid default. Some will find that, even after their loans are potentially forgiven after a couple decades they may still owe a large sum due to a tax bill.

Upon graduation, many students can’t afford their recommended monthly loan payments. So, to avoid default, they elect to participate in a program that only charges them a certain percentage of their annual income. But for those with higher debt and even higher interest rates, their overall debt could more than double over time.

Some may think that all is forgiven once their debt is forgiven, but NBC News reports that may not be the case while speaking to Michael Hulshof. Hulshof is now an attorney that left the University of La Verne in 2012 with a law degree and $145,000 in student loan debt. That figure has already grown to $220,000 due to interest rates and could get as high at $400,000 by the time he’s 55 years old.

Fortunately, Hulshof is in a repayment plan that will forgive his debt after 25 years. Unfortunately, that total debt that is forgiven is currently set up to be considered income and can be taxed by the government, meaning Hulshof will have to potentially pay $175,000 in taxes when that day comes.

“Me and my wife talk about it all the time, how we’ll deal with it at that point,” Hulshof said. “It’s incredibly depressing to think about, that bankruptcy may be your only option … to start over at 55 when you worked so hard to get an education to better yourself and society.”

NBC News reports that, as of Sept. 30, more than 4.2 million federal direct student loan borrowers were enrolled in one of the five available income-based payment plans. This is a 50 percent increase from 2014 and a 160 percent jump from 2013.

Politicians, borrowers and more are campaigning to lower interest rates or striking the loans from federal taxes so that borrowers won’t have to pay a massive bill in the distant future that may even be more than their initial loan’s total.

“Programs such as the income-based repayment program have helped in a small way to ensuring that students can continue to pursue their dreams and get on with their lives while they responsibly pay off their student debt,” Rep. Jim McDermott, D-Wash., said in a statement to NBC News. “However, slamming students and families with a massive tax bill after they have played by the rules is just wrong.”

While many people are coming together to work on a situation that appears to be painting borrowers into a corner, a slim silver lining can be found in the fact that the amount someone could pay in taxes will likely still be smaller than the total amount their loan accumulated due to interest rates.

Photo Credit: Flickr

 

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