Student Loan Forgiveness And Insolvency: Avoid The Tax Bomb

The student loan debt tax bomb can happen when you have to pay taxes on the student loan forgiveness you received. However, most people will avoid the tax bomb due to a tax process called insolvency. 

While some student loan forgiveness programs, like Public Service Loan Forgiveness (PSLF) are tax-free, others - like when you get your student loans discharged under Income-Based Repayment, are potentially taxable. 

However, there's one big exception - insolvency. Insolvency is a tax situation when your liabilities (such as forgiven student loan debt) exceed your assets (like the money in your savings account). If you are technically insolvent, you may avoid some or all of the taxes associated with your loan forgiveness.

That is a big win for borrowers getting their loans forgiven under IBR, PAYE, or ICR. Let's break down what that looks like.