Tl;dr: AmeriCorps interest payments and the Segal Education Award are counted as taxable income in the year they're disbursed. If you have six figures of student loan debt (not uncommon for those with grad degrees), you could be in for a nasty surprise come tax season. I ended up with a tax bill of $4k, which is hard to afford when you're working in a low paid public interest position.
As I wrap up filing my taxes, I just wanted to put this PSA out there for folks considering doing public service in an AmeriCorps position. I was part of the inaugural class of "justice AmeriCorps" members--recent law grads representing indigent children in immigration court. I graduated from law school with well over 100k in debt. The AmeriCorps position has very low pay for a first year attorney, however one of the 'perks' is that you can place your loans in forbearance during your AmeriCorps service. At the end of your service, AmeriCorps will pay off the accrued interest. You are also given a lump sum award of about $5k to put towards education loans of your choice.
Sounds like a great deal, right? Well, it's obvious that this scheme wasn't designed with higher education graduates in mind...
The problem is that Federal law specifically treats both the interest payment and the lump sum award as taxable income in the year they're disbursed. This isn't a huge issue for those with smaller loan balances. But for law school grads, where it's not uncommon for interest to accrue at $10-15k per year, you're looking at a potentially huge increase to your Adjusted Gross Income after AmeriCorps makes the interest payment on your behalf. The increase is even higher if you then use the lump sum to make additional payments.
In my case, the AmeriCorps payments added an additional 16k to my 2016 AGI, which increased my tax liability by about 4k. Not an easy thing to pay off on you're already trying to get by on a meager public interest salary.
If I were wiser, I would NOT have put my loans into forbearance and instead, just have made minimum payments on IBR while letting the interest continue to accrue (but not capitalize). This plan makes sense for someone on the path towards ten-year public service loan forgiveness, since you're not taxed on the forgiven amount.
I know there are a lot of aspiring social justice warriors out there who want to do good. I support people going into the public interest, however if you're considering an AmeriCorps position I would make sure you're able to afford the tax consequences of the 'award,' in addition to living on a very small stipend for the period of your service. You're going to have a hard time helping others if you're stuck in a financial mess yourself.
Submitted February 17, 2017 at 02:13PM by DerMuller http://ift.tt/2ls6BpF
