Student Loan Forgiveness...Do You Know The Dangers?

Cathy A. Robinson, CPA
Senior Manager
robinson@hwco.com

What many people ask themselves, especially millennial’s, is how they can take advantage of student loan forgiveness. Here’s what you need to know:  

Public Service Loan Forgiveness

 This program was created in 2007 and was intended to help to remove the student loan debt from those low-salaried employees of the public service industry. There are also some for profit employers who qualify your employment as a public service.  This list includes:  police officers, teachers, public defenders, and those in the public health sector.  Borrowers of federal loans may qualify for forgiveness on the remaining balance of their student loans if they have made 120 payments on their loans while working in the aforementioned list.

Income-Based Repayment

More people qualify for this type of plan. This plan allows borrowers to pay ten percent to twenty percent of their income towards their loans. These loans will then be forgiven in 20 to 25 years. But a word of caution, with this plan, you will pay more in interest over the life of the loan. 

Pay as you Earn

This plan caps out your payments to being ten percent of your income. Like the Income-Based Repayment plan, it lasts for 20 years, and any balance remaining after this time period will be forgiven. In order to qualify for this program, you need to have taken a loan after October 2007 and have borrowed a Direct Loan or a Direct Consolidated Loan.

In all three of these plans, your payment amount will never exceed the amount you would have to pay under the standard ten-year payment schedule. Unfortunately, like private loans, there are some dangers associated with these repayment plans.

• For income-based repayment plan, the amount of debt forgiven at the end of the plan becomes taxable income for the borrower. The borrower who received student loan forgiveness then faces large tax bills they typically cannot afford.

• You MUST remember to continue to qualify each year, meaning you must remember to send in the application and updated paperwork each year. Failing to do this will get you removed from the program.  

• For participating in Public Service Loan Forgiveness, you must be working full-time at a qualifying public service organization at the time you enter the program as well as at the time the remaining balance is forgiven.

This update is published periodically by HW&Co. as an information service to our clients, business associates and friends. It is general information and professional advice should be obtained before acting on any comments contained in this document.

The 4 Things you NEED to Know Before Taking Student Loans

Cathy A. Robinson, CPA
Senior Manager
robinson@hwco.com
 

 

There are two words that most people are familiar with: Student Loans. If you’re a parent of a child getting ready to go to college or you have a child that is already in college, sometimes student loans are simply unavoidable. Should this be the case, we have some must know tips for you!

 

1.       The first, and most important, point is this: complete the Free Application for Federal Student Aid (FAFSA). By taking advantage of federal student loans now you stand to reap some of the advantages later. These advantages could include:

·         A generally fixed interest rate.

·         You can limit the amount you repay each month later based on your income.

·         Loan forgiveness may be available for those pursuing a career in the public service industry after 10 years.

·         In some cases the federal government may also subsidize the loan –pay interest on- while the student is still attending school

 

2.       Be cautious of private student loans.

·         An advantage of borrowing a private loan is that you’re able to borrow at a higher limit.

·         The problem with borrowing private student loans, however, is that these loans generally come with a higher interest rate.

·         These loans also do not generally offer any kind of subsidies, loan cancellation or forgiveness programs.

·         Co-signers are also sometimes required if the student is applying for the loan and doesn’t have credit history. Should your child be unable to pay the loan on time or make the minimum monthly payment they would eventually look to you to take over the payments.

 

3.       Do your best to plan ahead.  What are the total projected expenses for the year?  Doing this can help you to figure out just how much to borrow or accept when it comes to student loans. If you’re awarded more than what you need, only utilize the amount that you need.  Remember, you have to pay it back in the end. By borrowing too much money now you may struggle to pay it all back later.  The debt must be paid back. This includes garnishing up to 15 percent of your wages and even garnishing Social Security benefits.

 

4.       Finally, some parents may qualify for a student loan interest deduction.  Generally, the amount you may qualify to deduct is less than $2,500 or the amount of interest you may have actually paid on the loan. This deduction is subject to decrease or phase out completely if and or when your modified adjusted gross income (MAGI) amount reaches the annual limit.  Ask your accountant if you qualify for this deduction. 

 

This update is published periodically by HW&Co;. as an information service to our clients, business associates and friends. It is general information and professional advice should be obtained before acting on any comments contained in this document.