As currently structured, July 2019 is the earliest any borrower may receive loan forgiveness under an income-based repayment plan and a tax bill from the IRS.
However, unexpected tax bills have already arisen for people who have had their student debt discharged after death or because they are permanently disabled.
In April, a bipartisan group of U.S. senators introduced a bill to eliminate the tax penalty levied on student loans forgiven for death or permanent disability.
"Families grieving the loss or permanent disability of a child did nothing wrong, and they should not be punished by the federal government with a massive tax bill," Republican Sen. Rob Portman of Ohio said in a statement when he co-sponsored the bill.
"The same tragic reason they cannot pay back their student loans is the reason that they cannot afford an enormous tax increase so contrary to the purposes of our student loan system."
The taxman doesn't care if your school closes either. If the 35,000 students enrolled in the recently shuttered ITT Tech schools successfully applied for loan discharges, they may still owe taxes on the amounts canceled.
The number of people affected by tax liabilities from income-based repayment plans will dwarf taxes owed for loan discharges from death, permanent disability and school closures.
The percentage of federal student loan borrowers enrolled in income-based repayment plans has quadrupled over the past four years from 5 percent in 2012 to nearly 20 percent in 2016. Though most borrowers in income-based repayment plans will pay off their debts, low-income workers likely will barely manage to cover the interest on their student loans as their balances grow.
Upon receiving student loan forgiveness, low-income borrowers will owe the IRS up to 25 percent of whatever amount is forgiven plus additional state taxes. Alexander Holt, an education policy analyst at New America, a nonpartisan think tank, used this example:
Take a person who started with $20,000 in debt and had a $20,000 salary in her first year out of college with a 2 percent raise every year. She would have about $44,000 ($30,000 in today's dollars) forgiven after 20 years. Having never paid more than $10 dollars a month, she would owe the IRS at least $4,000 in today's dollars in additional taxes that year, which would quadruple her income-tax payment (not including extra state taxes she may owe as well). Overall, that year her federal tax payment would be around 30 percent of her actual, near-poverty-level income.
"A plan that promises borrowers they never will owe a burdensome payment but eventually creates an impossibly large payment out of 'forgiveness' is deceptive and has the potential to stop low-income borrowers from enrolling in the program out of fear of the tax," Holt wrote in his January analysis of student loan forgiveness.
He estimated that the cost of tax-free loan forgiveness for borrowers in income-based repayment plans would be less than $20 million. That sum is tiny compared with the $11 billion the Department of Education spends on income-based repayment plans each year.