[massysett]

You can pay back $100 or pay 40% tax on $100 of forgiveness, which is $40. The choice is clear here. The only wrinkle is that the $40 might be due all at once. But if that's a concern, saving up ahead of time to pay back the $40 is still better than paying off the $100.

[jrs235]

I believe there was a short exemption window for income taxes on some mortgage defaults/forgiveness that Congress explicitly allowed. Otherwise debt forgiveness usually gets taxed as income and the amount would be due the tax year it is forgiven. The IRS does allow payment plans and I'm not certain how they would handle such a case as this. I would hope they don't tack on fees and interest but I could certainly seeing them do that. Granted your wages can be garnished to pay for student loans, I don't know who/what entity is chasing that money. Is it the IRS? With huge amounts of taxes due from a forgiveness, the IRS will be on your tail and now you have to choose, what's worse: owing more student loan debt or owing back taxes to the IRS (which if unpaid can lead to criminal proceedings)?

[atombath]

Of course a tax percentage of a value is going to be less than the value. The main penalty would be the tanking of your credit rating. The effect it would have on an interest rate for future loans would be very significant.