Should We Defuse the 'Tax Bomb' Facing Lawyers Who Are Enrolled in Income-Based Student Loan Repayment Plans?

138 Pages Posted: 8 Jun 2015 Last revised: 10 May 2016

See all articles by Gregory S. Crespi

Gregory S. Crespi

Southern Methodist University - Dedman School of Law

Date Written: May 8, 2016


Starting in 2033 first thousands and then later tens of thousands of mid-career lawyers who have previously incurred large student loan debts, and who unfortunately have been able to earn only relatively modest annual incomes in the 20 or 25 years following their law school graduation, will be subject each year to large cancellation of indebtedness-based federal and sometimes also state income tax obligations. These obligations will result because a large portion of the substantial student loan debts that have been incurred by many law school graduates will eventually be forgiven under one or another variant of the increasingly popular federal Income-Based Repayment Plan (“IBR Plan”) in which those persons have enrolled after their graduation, and those forgiven debts will then be treated under the Internal Revenue Code as taxable income.

These tax bills will often be in the neighborhood of $50,000 to $100,000 or even larger for those lawyers that have enrolled in the recently implemented Pay As You Earn Plan (“PAYE Plan”) version of the IBR Plan, and in the neighborhood of $15,000 to $25,000 for those lawyers who have enrolled in the earlier-established “old IBR” version of the IBR Plan. Many of these lawyers will have failed to adequately provide for this large tax obligation and will find that it will impair or even devastate their retirement plans.

The phrase “tax bomb” is an apt one to describe this large tax obligation that will be imposed on income that is attributed to but not actually received by a relatively small group of taxpayers. This article explains how this tax bomb was created and how the various statutes and regulations that define its scope and size have evolved over time from the original 2009 implementation of the IBR Plan up through the Department of Education’s proposed new Revised Pay as You Earn Plan (“REPAYE Plan”) rules that will be in force as of December of 2015. It then offers detailed illustrative calculations regarding its magnitude for both PAYE Plan and old IBR Plan law graduate enrollees, both for typical individual enrollees and in the aggregate. Based on the limited available Department of Education statistics I have estimated that the number of law graduates who will enroll in one or another of these Plans in 2015 and each year after that will be approximately equal in size to 50% of that year’s law school graduating class. Under the further assumption that Plan law graduate enrollees will experience average annual growth in their “real” incomes in the decades after their Plan enrollment of 2%/year, my estimate is that the aggregate impact of the tax bomb on lawyers alone will start at about $115 million in 2033 as it first impacts only about 1,650 lawyers in that year, but then the impact will grow rapidly to over $700 million per year by 2037 as it begins to affect tens of thousands of lawyers annually, and the size of the tax burden imposed will level off at about $1.2 billion/year indefinitely by 2040. Its impact will be even larger than this, perhaps significantly so, if the comparable and generally much smaller individual tax obligations that will be imposed on some medical school graduates Plan enrollees, and on some other graduate and professional school Plan enrollees, and on some of the many Plan enrollees who have borrowed only smaller sums for their undergraduate studies, are also considered.

Finally, the article discusses whether measures should be taken to mitigate or even eliminate this tax bomb before these obligations begin coming due in 2033. I have concluded that no such measures are justified except for a minor amendment to the Internal Revenue Code allowing persons to pay their tax liabilities on forgiven student loan debt over a period of several years. However, I also discuss several other alternative measures that might be taken to reduce the tax bomb’s consequences, including the amendment of the Internal Revenue Code to abolish these consequences altogether.

Suggested Citation

Crespi, Gregory S., Should We Defuse the 'Tax Bomb' Facing Lawyers Who Are Enrolled in Income-Based Student Loan Repayment Plans? (May 8, 2016). SMU Dedman School of Law Legal Studies Research Paper No. 225, Available at SSRN: or

Gregory S. Crespi (Contact Author)

Southern Methodist University - Dedman School of Law ( email )

P.O. Box 750116
Dallas, TX 75275
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics