@NCperson
I wasn’t up-to-date on the provision of the rescue plan that makes a student loan forgiveness tax free up till 2025, so that would have to be figured into any calculation by married spouses. If they aren’t within the window to make it by that date, they are still looking at abandoning many years of tax benefits of filing jointly for an uncertain prospect of loan forgiveness.
I’m not convinced about the tax free status of all PSLF. There is a provision that student loan forgiveness is tax free for certain programs that encourage public service in underserved areas, such as graduating from medical school and opening a practice in a poor and minority rural area. But PSLF is available to nearly anyone who works for a nonprofit, and I’m not sure (without doing a lot more research) that somebody working for a celebrity nonprofit in Hollywood (for example) would qualify for the same tax-free treatment as somebody working in rural Mississippi. They might qualify for loan forgiveness but not the tax free part, I don’t know about that and I would have to do more research.
Even assuming all loans forgiven under PSLF are tax-free, the last reported success rate for PSLF applications was 1.34%; a million people have applied and 11,000 were awarded. The paperwork and documentation requirements are so burdensome that 98% of applications have been rejected so far. President Biden did issue an executive order to loosen up the requirements and allow people who have been denied to cure their applications and reapply, but it is too early to know how much positive effect that will have. And of course, PSLF only applies to government loans, not privately held student loans.
My purpose in raising these issues is to inform taxpayers that filing separately to qualify for income based reduction of payments is a mixed bag at best. The taxpayers may abandon 10 or 20 or 25 years worth of tax benefits of filing jointly, while the debt continues to increase when the low payments aren’t sufficient to pay down the principal balance. Loan forgiveness is uncertain and may be taxable, and may depend on the winds of political fortune.
