Medical Bills, Student Loans and Tax Debt

Medical bills, student loans and tax debt do not behave like credit cards. Each comes with its own rules: hospital charity programs and billing protections, federal repayment plans tied to income, and IRS payment plans and penalties. Treating them like ordinary debt, by putting a hospital bill on a card or paying the IRS late without a plan, often costs more than it needs to. This chapter explains the options built into each, and the order in which to use them.

Medical bills: check, ask, then plan

Medical debt is unusual because the amount is often negotiable and frequently wrong. Work through it in this order.

Check the bill. Ask the provider for an itemized bill and compare it with your insurer's explanation of benefits. Look for duplicate charges, services you did not receive, and claims denied for reasons that can be fixed, such as a coding error or a missing referral. If the insurer denied a claim, you have the right to an internal appeal and, for most plans, an external review.

Know the protections. Since 2022 the federal No Surprises Act has protected most people with health coverage from surprise out-of-network bills for emergency care, and for care from out-of-network clinicians at an in-network hospital or facility; in those cases you owe only your in-network cost sharing. People without insurance, or not using it, have the right to a good-faith estimate before scheduled care, and can dispute a bill that comes in substantially higher.

Ask for financial assistance. Nonprofit hospitals, which are most U.S. hospitals, must have a written financial assistance policy to keep their tax exemption. Eligibility is usually set as a multiple of the federal poverty guideline, which for one person in the 48 contiguous states is $15,960 in 2026, and many policies reach well into middle incomes. Patients who qualify cannot be charged more than the amounts generally billed to insured patients. The hospital must also make reasonable efforts to tell you about the policy before taking serious collection actions such as reporting to credit bureaus or suing, generally waiting at least 120 days after the first bill, and must accept applications for at least 240 days. Apply even if the bill is already old.

Then set up a payment plan. Most providers offer interest-free monthly plans. That is almost always cheaper than moving the bill to a credit card.

At $150 a month, a $3,000 bill on a card at 24.0% takes 26 months and costs $870 in interest. On an interest-free plan the same payment clears it in 20 months with no interest. Be careful with medical credit cards offered at the front desk: many use deferred interest, which charges interest back to the date of service on the whole original amount if any balance remains when the promotion ends.

Credit reports. Since 2023 the three nationwide credit bureaus have kept paid medical collections, medical collections less than a year old, and small medical collections off credit reports. A 2025 federal rule that would have removed most medical debt from credit reports was struck down in court the same year, and several states have their own limits, so check the current rules where you live. If you itemize deductions, medical expenses above 7.5% of adjusted gross income are deductible, and a health savings account can reimburse qualified bills tax-free.

Federal student loans: use the plans before you fall behind

Federal student loans offer something no other consumer debt does: a payment that can be set by your income rather than your balance. The cost of using that flexibility is time. A longer repayment means more interest unless the balance is eventually forgiven.

Repaid over 10 years, $35,000 at 6.5% costs $397 a month and $12,690 in interest. Stretched to 20 years, the payment falls to $261, but the interest rises to $27,628. Income-driven plans work differently again, because the payment follows income and any balance left at the end is forgiven.

The rules changed in 2025 and 2026, so check which plans your loans can use on Federal Student Aid. For loans disbursed before July 1, 2026, the main options as of this writing are:

• The 10-year Standard Plan, a fixed payment that clears the loan in ten years and costs the least interest.
• Income-Based Repayment (IBR), which sets the payment at 10% of discretionary income for newer borrowers (15% for loans before July 2014), never more than the Standard payment, and forgives the remaining balance after 20 or 25 years. Discretionary income is adjusted gross income minus 150% of the poverty guideline for your family size.
• The Repayment Assistance Plan (RAP), which opened in July 2026 and sets the payment at 1% to 10% of adjusted gross income depending on income, reduced for each dependent. Interest a payment does not cover is waived, and any balance left after 30 years of payments is forgiven.

Loans disbursed from July 1, 2026 can use only a tiered standard plan or RAP. If you work full-time for a government agency or a qualifying nonprofit, Public Service Loan Forgiveness cancels the remaining balance tax-free after 120 qualifying monthly payments. Forgiveness at the end of an income-driven plan, by contrast, may count as federal taxable income for balances forgiven after 2025.

Three cautions. Do not stop paying without arranging a plan, deferment or forbearance: a defaulted federal loan can lead to your tax refund being taken and up to 15% of your disposable pay being garnished without a court order. Refinancing federal loans with a private lender gives up all of these plans permanently. And if you are already in default, loan rehabilitation, nine on-time payments within ten months, removes the default from the loan's record. The student loan repayment plan calculator compares Standard, IBR and RAP on your own income and balance, and the student loan book on this shelf goes further.

Tax debt: file on time, then choose a plan

Owing the IRS is expensive mainly because of penalties and interest, and the largest penalty is for not filing at all. The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. The failure-to-pay penalty is 0.5% a month, also up to 25%. Interest runs on top, at the federal short-term rate plus three percentage points, compounded daily and reset each quarter. The single most useful step is to file on time even when you cannot pay.

Then choose from the IRS's options, most of which you can set up online:

• Pay in full, if you can borrow cheaply enough to do it. Putting tax on a high-rate card is rarely cheaper than a payment plan.
• A short-term payment plan of up to 180 days, if you owe less than $100,000 in combined tax, penalties and interest. There is no setup fee, but penalties and interest continue until it is paid.
• A long-term payment plan (installment agreement), which you can set up online if you owe $50,000 or less. There is a setup fee, lower for online and direct-debit plans and reduced or waived for low-income taxpayers. While a plan is in effect on a return filed on time, the failure-to-pay penalty drops to 0.25% a month.
• An offer in compromise, which settles the debt for less than the full amount. The IRS accepts it only when it judges that the amount offered is the most it can reasonably collect, based on your income, expenses and assets. Use the IRS's pre-qualifier before paying the application fee, and be wary of firms that promise to settle for "pennies on the dollar".
• Penalty relief. If you had no penalties in the previous three years, you can usually ask for first-time abatement of failure-to-file and failure-to-pay penalties. Relief is also available for reasonable cause, such as serious illness or a disaster.
• Currently not collectible status, if paying anything would leave you unable to meet basic living expenses. Collection pauses, but interest and penalties continue.

Ignoring IRS notices leads, over months, to a federal tax lien and then a levy on wages or bank accounts. Each notice states your deadline and options. State tax agencies run their own, often similar, payment plans. If you owe more than you can handle or face a levy, the independent Taxpayer Advocate Service and Low Income Taxpayer Clinics can help.

When to get professional help

Get help before acting if you are being sued over a debt, face a wage garnishment or tax levy, are considering bankruptcy, or have several of these debts at once. A nonprofit credit counselor, a consumer or bankruptcy attorney, an enrolled agent or CPA for tax matters, and your loan servicer for federal student loans each handle different parts of the problem. Most tax debt and federal student loans are difficult to discharge in bankruptcy, which is one more reason to use the payment plans built into each.