With the rising cost of Education each year, student loan seems to be a lifesaver for many. Unfortunately, however, the number of Americans owing student loans increases as each year progresses. These loans have become a huge part of the life of youths and some young adults.
Even with all this, there are still some parts of student loan details that many do not understand. This could go a long way to affect your overall financial health.
• If you do not Correct an income-driven repayment plan on time, the extra Income will capitalize
It will be pretty more comfortable to manage an income-driven repayment plan. Since there will be monthly payments to take care of the loan. This, however, comes with a strict warning.
Subsidized loans: that are on the income-driven repayment plan have the potential for capitalization. If not the unpaid interest will be added to the entire amount, you need to pay the loan. With the IBR, PAYE, and REPAY plans, borrowers that have monthly payments lower than what they need to take care of the total amount of interest will have the government taking care of their interest for as long as three years.
Unsubsidized Loans: people on an income-driven repayment plan have the advantage of capitalization of loan, which is less generous on REPAYE plans. This comes with no three year period. The government, however, takes care of 50% of the interest that the monthly payment does not cover. This is available for the REPAYEE plan
Participants on the three categories (Income-Based Repayment, IBR; Pay As You Earn, PAYE; and Revised Pay As You Earn, REPAYE) should try and readjust their plans every year. With this, it is essential to submit documentation, including income and tax returns to the Department of Education every year. This data is used to calculate a new monthly payment plan.
If a borrower, however, does not certify their income-driven repayment plan when due, the extra payment on their loan will capitalize. This could lead to thousands of dollars in addition to their balance.
With this in mind, people on the income-driven repayment plan should try and certify when due. It even works in your favor if you get the paperwork over with as soon as possible. This will take care of any delay that might want to come from the loan servicers.
• No benefits on the Credit Report for Students Repaying Parent PLUS loans
We have two forms of PLUS loans:
• Graduate student loans, and
• Parents of undergraduates do take this. It is called Parent PLUS loans.
Parent PLUS loans only reflect on the parent’s credit report. No matter the agreement of both parties, the negative or positive payment history will only affect the credit score of the parent and not the child.
The Department of Education has made it impossible to transfer loan responsibility from parents to the child. As a result, parents have to answer for their kid's financial behavior.
On account of the death of the parent with a Parent PLUS loan, the child does not take responsibility. On the other hand, this loan gets discharged. This remains the case as well if the child in question dies.
• Forgiven Student Loans Could be Considered Taxable Income
According to the IRS, any debt you are forgiven is classified as an income. This explains why students are faced with a huge tax bill even if their federal student loan is forgiven. Borrowers with enrollment in income-driven repayment plans have their monthly payment pegged at a particular percentage. The outstanding balance is then forgiven after a repayment period of at least 20 years.
Even though this seems like a good deal, you will have to pay tax on forgiven debt since the IRS classifies it as income. The only condition to escape the tax on the debt is if you complete the requirement for public service loan forgiveness.
You can avoid this considerable tax, provided you can prove you are insolvent. This means that your liabilities are more than your debt.
The fact that you might be faced with huge tax debt should not discourage you from going for income-driven repayment plans.
Conclusion
All in all, whatever the means with which you chose to repay your student loans, be sure you keep making payment to prevent it from going into default.
Advanced Accounting & Tax Planning