Don’t Fall For The Scams!
When it comes to student loans in the US, things can get very confusing, very fast. But there are a few very important things to keep in mind when you’re trying to lower your student debt.
The first is this: Companies will charge you to seek out student loan debt relief when in reality you can pursue it on your own, for free! Doing your research and knowing what is or isn’t available to you is vital if you want to lower – and eventually free yourself – from student load debt.
As student loan debt grows, more and more borrowers are looking for a way to get rid of it. Enter student loan debt relief companies.
Some say they’ll give you access to “Obama student loan forgiveness” programs, while in reality they charge you to sign up for income-driven repayment plans or to consolidate your federal student loans — which you can do on your own for free.
Here’s the reality about so-called “Obama student loan forgiveness,” and how you can take advantage of legitimate programs instead.
There is no “Obama student loan forgiveness” program
Under President Barack Obama, federal legislation went into effect that made it possible for borrowers to repay their federal student loans based on their incomes. These programs, called income-driven repayment plans, also forgive your loans after 20 or 25 years of repayment. Borrowers who work in public service can have their loans forgiven in 10 years through the Public Service Loan Forgiveness program.
Generally, these initiatives are what student loan assistance companies refer to as “Obama student loan forgiveness.” The problem? You can apply for an income-driven repayment plan for free by completing an Income-Driven Repayment Plan Request form on studentloans.gov. Applying for Public Service Loan Forgiveness will be free, too, once the application becomes available around October 2017.
But student loan debt relief companies will charge you a fee — upfront, on a monthly basis or both — to submit your income-driven repayment application. They will also charge to consolidate your student loans, which makes certain loan types eligible for either income-driven repayment or Public Service Loan Forgiveness.
– via NerdWallet
Student Loan Forgiveness Can Come With Major Tax Headaches
Another thing to keep in mind for student loan forgiveness is the tax implications. Some forgiveness plans are tax-free, but others could potentially leave you with double, triple, or even quadruple your annual tax payment, which for most of us is an unattainable payment. This system forces you into a whole new debt cycle.
Student loan forgiveness is possible and can be done carefully, but making sure you know the rules and regulations is key to make sure you make your situation better, not worse.
The federal government currently offers two types of loan forgiveness for student debt: public service loan forgiveness and loan forgiveness provided by income-based repayment plans, the latter of which requires two decades or more of loan repayment.
The public service route is tax-free while debt canceled by income-based repayment plans is taxed. That potential tax liability could be crippling to lower-income borrowers.
“It replaces student loan debt with tax debt,” said Mark Kantrowitz, publisher of Cappex, a website that connects students with colleges and scholarships.
Tax trouble on the horizon
As currently structured, July 2019 is the earliest any borrower may receive loan forgiveness under an income-based repayment plan and a tax bill from the IRS.
However, unexpected tax bills have already arisen for people who have had their student debt discharged after death or because they are permanently disabled.
In April, a bipartisan group of U.S. senators introduced a bill to eliminate the tax penalty levied on student loans forgiven for death or permanent disability.
“Families grieving the loss or permanent disability of a child did nothing wrong, and they should not be punished by the federal government with a massive tax bill,” Republican Sen. Rob Portman of Ohio said in a statement when he co-sponsored the bill.
“The same tragic reason they cannot pay back their student loans is the reason that they cannot afford an enormous tax increase so contrary to the purposes of our student loan system.”
The taxman doesn’t care if your school closes either. If the 35,000 students enrolled in the recently shuttered ITT Tech schools successfully applied for loan discharges, they may still owe taxes on the amounts canceled.
The number of people affected by tax liabilities from income-based repayment plans will dwarf taxes owed for loan discharges from death, permanent disability and school closures.
The percentage of federal student loan borrowers enrolled in income-based repayment plans has quadrupled over the past four years from 5 percent in 2012 to nearly 20 percent in 2016. Though most borrowers in income-based repayment plans will pay off their debts, low-income workers likely will barely manage to cover the interest on their student loans as their balances grow.
Upon receiving student loan forgiveness, low-income borrowers will owe the IRS up to 25 percent of whatever amount is forgiven plus additional state taxes. Alexander Holt, an education policy analyst at New America, a nonpartisan think tank, used this example:
Take a person who started with $20,000 in debt and had a $20,000 salary in her first year out of college with a 2 percent raise every year. She would have about $44,000 ($30,000 in today’s dollars) forgiven after 20 years. Having never paid more than $10 dollars a month, she would owe the IRS at least $4,000 in today’s dollars in additional taxes that year, which would quadruple her income-tax payment (not including extra state taxes she may owe as well). Overall, that year her federal tax payment would be around 30 percent of her actual, near-poverty-level income.
– via CNBC
Have you considered looking into student loan forgiveness?