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Tax bomb warning given to young US lawyers over debt plans

By Neasa MacErlean

10 June 2015 at 06:23 BST

New graduates from law schools could be facing a 'tax bomb' in 17 years time if they are forgiven part of their educational loans, according to a professor at Southern Methodist University.

Law students may face a tax liability over loan forgiveness Drogba

Under new schemes, graduates can pay back just 10 to 15 per cent of their disposable income each year to pay off part of their student loans. This could mean that they still have sums outstanding at the end of the 20 or 25 year periods over which the repayment schemes run. At that stage, the balance would be written off. 

Debts of over $50,000

However, there could still be a tax liability - as sums written off would be seen as income under the tax code. The first scheme finishes in 2032. People hit the hardest by the scheme and the tax forgiveness charge could end up owing $125,000, accoring to calculations performed by Professor Gregory S Crespi. Others might find they owed $50,000.


The two schemes that the Professor is concerned about are the 'Pay As You Earn' and 'Income-Based Repayment Plan'. While these schemes are open to other students as well as those in the law faculty, the professor believes that the higher costs of a legal education and the potentially volatile earnings of lawyers could make the legal sector more vulnerable. Source: Wall Street Journal


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