Lawmakers seek end to B-On-Time loan tax

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Students who receive forgivable loans under the B-On-Time program receive something in addition — an income tax form.

Under federal law, forgivable loans such as the B-On-Time loan count as taxable income if the loan is forgiven under the program’s criteria.

Although the information is not new and is available on the Texas Higher Education Coordinating Board’s website, the provision has provoked concern from some Texas lawmakers, such as state Rep. Helen Giddings, D-DeSoto. Giddings, who serves on a subcommittee of the House Appropriations Committee, said she and other members sent letters to Texas’ congressional delegation in Washington informing them that lawmakers at home hope to see changes.

“I think when you sign up for the B-On-Time loan and you’re 17 or 18 years old, even 19, you’re not thinking about the end game,” Giddings said. “If you said to an 18-year-old that it is a forgivable loan, I’m not sure that they understand that that means it becomes taxable income once it’s forgiven.”

The program, established by the Texas Legislature in 2003, administers zero-interest loans to students who complete their degrees within four years for a four-year degree and five years for a five-year degree, maintain a 3.0 grade point average and do not exceed their degree plan by more than six credit hours.

Giddings said concern within the committee crosses partisan lines and found the support of state Rep. John Otto, R-Dayton, the subcommittee’s chairman.

Thomas Melecki, Office of Student Financial Services director, said discussion in Washington concerning whether to pass legislation making forgivable loans non-taxable income has died down.

“That’s pretty much ground to a halt given the current financial situation,” Melecki said.

Melecki said students pay taxes on the loan the year it is forgiven and suggested students participating in the program set aside money to try to offset the impact of increased tax payments.

“Let’s say that you get out of school and you are earning $25,000 a year and then you get your B-On-Time loan forgiven,” Melecki said. “That would add on $12,000 [if you received the loan for four years], which takes you up to $37,000 in taxable income before deductions.”

Melecki said his office does not advise students regarding the taxability of forgiven loans but said the office would consider doing so in the future.

“We do try to be straightforward about loans, but every once in a while, we miss something and shame on us when that happens,” Melecki said.

There are 384 UT students who receive an average annual loan of about $6,855 under the program, according to data provided by the Office of Student Financial Services.

Isaac Crone, Italian and liberal arts honors junior, participates in the program and said he does not mind paying taxes on the forgiven loan because the cost incurred by the tax outweighs paying back the cost of the loan.

“If they could reform the program without the tax, I think it’d be great,” Crone said. “However, if they kept the tax, I wouldn’t drop the loan.”