Student loans have become a necessary burden for many students. According to a 2014 study by Experian, 40 million Americans are now affected by student loan debt, up from 29 million in 2008. Despite this increase, there's still a lot of confusion surrounding student loans. Often it's not as simple as borrowing money and paying it back.
Whether you're thinking about taking out student loans or are in the thick of making payments, here are six things you should know.
1. Student loan interest may be tax deductible.
Feeling overwhelmed by your student loans? Here's a piece of good news: your student loan interest may be tax deductible. If your modified adjusted gross income (your gross income plus certain deductions) is less than $80,000 ($160,000 if filing a joint return), in 2014 you might have been able to deduct up to $2,500 in student loan interest on your taxes.
2. You may be hit with a tax bill if your loans are forgiven.
Student loan forgiveness is an option for federal student loan borrowers who choose an income-driven plan, such as income-based repayment, pay as you earn or income-contingent repayment. For example, after 20 or 25 years of qualifying monthly payments under income-based repayment, your remaining balance can be forgiven.
The downside? Under current tax law, your forgiven balance could be considered taxable income, which might mean a hefty tax bill. For example, if you have $30,000 forgiven, you could have a several thousand dollar federal tax bill.
3. In very rare cases, student loans might be dischargeable in bankruptcy.
In general, student loans can't be discharged in bankruptcy. However, it's not totally impossible. Borrowers who offer proof of "undue hardship" may be able to discharge their student loans in bankruptcy. In order to get loans discharged, borrowers typically need to prove that their current income would not allow them to sustain a minimal standard of living in addition to their debt repayment.
According to a study by researcher Jason Iuliano, people who successfully discharged their loans fell into one or more of the following three categories -- they were less likely to be employed, they had higher instances of medical hardship, and they had lower incomes the year before they filed for bankruptcy.
4. You may be able to get a better rate by refinancing.
When I graduated a few years ago, borrowers were stuck with the interest rate on their federal student loans, which could either be a blessing or a curse.
"Federal student loans are fixed, creating a predictable amount of interest accrual. However, if those rates are fixed on the higher end, it becomes a burdensome amount of interest to repay considering the low interest rate environment we share today," says Vince Passione, CEO and Founder of LendKey, a student loan refinancing company.
Luckily, times have changed and if you have excellent credit, you might be able get a better interest rate by refinancing your student loans. Through student loan refinancing, you can combine your federal student loans -- and sometimes your private student loans as well -- and pay one loan back instead, potentially with a lower interest rate.
In some cases, you may be able to save thousands of dollars. For example, at student loan refinancing company CommonBond, members save an average of $14,000 over the life of their loan, according to Phil DeGisi, CommonBond's chief marketing officer.
However, in order to get the best rate from any student loan refinancer, you typically need to have an excellent financial profile. And if you do refinance, you may lose federal benefits, such as student loan forgiveness and access to federal repayment plans.
5. A co-signer's death might trigger auto-default.
A death in the family can be a heartbreaking tragedy. Imagine that, coupled with a notice that your student loans are due immediately. Unfortunately, that's not a nightmare, but a reality for some student loan borrowers. The death of a co-signer, usually a family member, could trigger auto-default, resulting in the full balance of your loans being due immediately.
If you want to avoid this situation, you may want to look into co-signer release. Co-signer release is the process of releasing your co-signer so they no longer have financial responsibility toward paying your loans.
Each lender has its own process; however, they'll typically want to know that you can afford to pay back your loans on your own. For example, Sallie Mae requires borrowers to make 12 on-time payments and show proof of income in order to be eligible for co-signer release, amongst other requirements.
6. Your wages can be garnished if you default on your loans.
You may wish your student loans didn't exist, but avoiding your student loans can cause serious trouble -- you'll typically enter default after 270 days of non-repayment.
Default can wreak havoc on your credit score. Not only that, but your wages could be garnished. In other words, if you don't pay back your student loans, your loan servicer can generally come after the unpaid balance in the form of garnished wages, taking up to 15 percent of your disposable pay. If you're unemployed, money could be withheld from your federal tax refunds.
One way to stay on top of payments is through auto-pay, which automatically deducts your payments from your bank account. If you're unable to make payments, consider contacting your loan servicer immediately.
If you have federal loans and have no to low income, think about signing up for an income-based repayment plan -- you can also check if you qualify for deferment or forbearance.
Though more Americans have student loans than ever before, the laws, rights and regulations surrounding student loan debt can be confusing. As a student loan borrower, it's important to understand all potential scenarios in order to avoid any unwanted surprises.
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