I’ve got $400K in loans at 7% interest, which adds up to $28K per year just in interest. I make $80K a year and my minimum payment is $8K (10% of my income). That’s not even covering the interest. So next year, does my interest go up to 7% of $420K? Am I paying interest on the interest?
Also, let’s say after 25 years, I’ve paid $200K, and the government forgives the remaining $200K. Will I be taxed on that forgiven $200K? And what about the interest that wasn’t paid?
It depends on the plan you’re on. Some plans, like SAVE, forgive unpaid interest, so your balance doesn’t grow. Other plans forgive less interest. If you’re on a plan that doesn’t cover all the interest, your tax would include the original balance and the interest that wasn’t paid. As of now, forgiven amounts are taxed after 2025 unless Congress extends the tax-free period. You should check out the loan simulator on the education site to see how this might play out.
Bennett said:
@Soren
If I had $223K in loans forgiven, how much would I owe in taxes?
Depends on where you live. Federally, forgiveness isn’t taxed, but in some states, like NC, it could be taxed as income. In NC, it would be $0 for federal taxes but you’d still owe state taxes.
Hayes said:
@Reagan
That’s true for now, but it might change next year.
Wait, even for Public Service Loan Forgiveness (PSLF)? That’s what I thought was tax-free.
Hayes said:
@Reagan
That’s true for now, but it might change next year.
Wait, even for Public Service Loan Forgiveness (PSLF)? That’s what I thought was tax-free.
Yes, PSLF isn’t taxed federally. There’s only one state that might tax it, but I can’t recall which one.
Hayes said:
@Reagan
That’s true for now, but it might change next year.
They haven’t renegotiated that part yet.
@Reagan
Actually, in NC we have a flat 4% income tax. So, if your loans get forgiven, that amount is treated as income and taxed. I had $72K forgiven, and I’ll owe about $3500 in state taxes. Plus, in 2025, the federal moratorium on taxing forgiven loans ends, so it will be taxed as federal income after that. But PSLF remains exempt from federal taxes.
@Ren
Thanks for clearing that up. $3500 is still better than $72K though, congrats on getting that forgiven!
Bennett said:
@Soren
If I had $223K in loans forgiven, how much would I owe in taxes?
It’s tough to say without knowing the exact forgiven amount or your tax bracket at the time. And remember, these taxes apply to income-driven repayment (IDR) plans after 2025, not PSLF.
How does someone rack up $400K in debt without understanding how loans work? It’s crazy!
Haru said:
How does someone rack up $400K in debt without understanding how loans work? It’s crazy!
Med school.
Haru said:
How does someone rack up $400K in debt without understanding how loans work? It’s crazy!
Med school.
Aren’t doctors supposed to be smart though?
@Haru
Being good at memorizing stuff doesn’t always mean understanding everything. Medical doctors aren’t paid or respected as much as they used to be. There are studies showing that people who went into other fields made out better in the long run.