Community colleges are rarely perceived as having the same level of prestige as many four-year universities. Unfortunately, that can lead eager new students to pass them up despite their many benefits.
What are those benefits, exactly? Few people would be shocked to hear community colleges are less expensive than four-year universities. But you might be surprised at how much a student can really save.
The advantages don’t end there. Money is only part of the picture. Read on to find out why students should seriously consider spending the first two years of their undergraduate career in community college.
However, the amount a student has to spend (or borrow) to complete a four-year degree is slashed when the first two years are completed at a community college.
A recent Student Loan Hero study on the cost of a college credit found that, on average, a college credit from a community college is 60% cheaper than one at a four-year public university. This translates to an average savings of $11,377 for a student who earns their first 60 credits at a two-year public school before transferring to an in-state public university. (If this sounds like your plan, be sure to read this guide to federal student loans.)
2. Make Up for Mediocre Grades
Not all teens have the ability or the attitude to do well in high school. Because academic success is largely determined by grades, students who earn poor grades have little chance of getting into a decent college.
There aren’t any do-overs — that is, unless they enroll in community college. “I was a smart kid, but I hated high school, so I didn’t do well. As I look back, I also wasn’t mature enough at the time to have succeeded at a four-year school,” said Roberto Santiago, a community college professor at Ohlone College in Freemont, California.
“Going to community college allowed me to grow into growing up,” Santiago said. “I became an ‘A’ student, was on the Dean’s List and eventually graduated cum laude. I also started to enjoy school. I enjoyed it so much I’m now writing my dissertation and expect to have a Ph.D. within a year.”
Not every high school graduate is ready to take on the demands of a four-year university. Some students need additional support in certain subjects. Others require more time to grow up. Community college allows fresh high school grads to work toward earning their degrees while providing some breathing room during the transition.
It’s not a stretch to assume that the typical 18-year-old doesn’t exactly have their life figured out. Even if they do, the plan is likely to change several times. Unfortunately, many four-year programs require students to enroll full time, even if they haven’t chosen a major.
Not all students are prepared to hit the ground running when it comes to pursuing their degrees. Alissa Carpenter, a career discovery and personal development coach who owns the business Everything’s Not OK and That’s OK, explained that it can be a “hard pill to swallow” if a student isn’t sure what they want to do and has to spend thousands of dollars to figure it out.
“Community colleges give you the opportunity to take courses at your own pace,” Carpenter said. “This affords the student flexibility to have a job, decrease course loads and explore potential majors without the pressure and potential financial burden.”
Santiago echoed this sentiment. “The flexible schedule allowed me to work full time and attend school around my work schedule. I was also able to take a reduced course load with no penalties,” he said. “Without that flexibility, I would never have been able to succeed.”
There are a lot of good reasons to start off at a community college, regardless of a student’s situation. Even those who aced their Advanced Placement courses and have clear visions for their careers can stand to reap the financial benefits. By saving money in the first two years, students can accumulate less debt, pay off student loans faster and live their lives with less of a financial burden.
“I believe strongly in the community college mission,” said Santiago. “There are a lot of smart kids who, like me, had poor grades, or a poor attitude, or don’t have the money for a four-year school right after high school. Community college allows these kids to start exploring college at whatever pace they can manage. It can take more time, but it can be a boon for a great many students.”
Have you looked at the cost of attending college recently? The price of tuition and fees has increased, on average, $280 per year for the last decade, according to College Board. That adds up over time, so it’s no wonder many turn to student loans to afford their education.
But now that you’re approaching the end of college — or perhaps you’re already done — it’s time to figure out how you’re going to repay those loans. Before you make a decision about how to move forward, here are five things you need to know as a student loan borrower.
1. The Difference Between Federal & Private Student Loans
The first step in deciding how to pay off your college debt is knowing whether you have federal or private student loans.
Federal student loans are issued by the government. These loans have interest rates set by Congress and come with certain protections and benefits (like income-driven repayment options, deferment/forbearance and loan forgiveness).
Private student loans, on the other hand, are issued by financial institutions. They usually have higher interest rates than the loans you get from the government. Private loans don’t come with the same benefits as federal loans. But some of the best lenders will offer options to borrowers who experience financial hardship.
To simplify the repayment process, you can consolidate all of your federal loans together to make one payment each month. But you can’t include private loans in a federal consolidation.
On the other hand, if you refinance your loans privately, you can include federal and private loans together in one big loan. However, once you refinance your federal loans, you lose those benefits and protections mentioned above.
When I was faced with this choice, I consolidated my federal loans and refinanced my private loans separately. Sure, I made two payments for a while until I paid off the private loans. But this ensured that the bigger chunk of my debt — my federal loans — retained protection.
2. When & How to Enroll in an Income-Driven Repayment Plan
If you can’t afford your student loan payments, there is hope. If you have federal loans, you can set up a repayment plan based on your income.
The government offers income-based repayment plans for different situations. Your payment each month is limited to a percentage of your income. At the end of a set term, if you still have some federal student debt left, the remaining balance is forgiven.
You can’t get income-based repayment for private student loans, however. If you refinance federal student loans privately, you lose access to income-driven repayment options.
Be careful when choosing income-driven repayment, though. A longer loan term and a lower monthly payment can mean that you actually end up paying more than you expected over time. On top of that, there is a good chance that loan forgiveness might come with hefty tax consequences.
By the time you’re done with college, it’s not surprising if you don’t know exactly how much you owe. Thankfully, this is a simple problem to solve.
The Department of Education will usually assign a servicer to your account. Private lenders usually will, too. Your loan servicer is the middleman between you and your student loan lender. They’re in charge of facilitating payments, making sure the terms of the loan are met and working out a payment plan if you’re struggling to keep up.
Of course, if you have several student loans, you probably also have several servicers. And it’s not always easy to figure out who they are.
To find federal student loan information about what you owe and who services your loan, go to the National Student Loan Data System. Select “Financial Aid Review” and accept the terms and conditions. You will need your FSA ID, but you can create one if you don’t have one yet. Once you’re in, you can see how much you owe, how much you’re paying in interest and how to contact your loan servicer.
When it comes to private student loans, the best way to find out who services them is by checking your credit reports. Your credit report will list all your open accounts. (You can view a free snapshot of your credit report, with updates every two weeks, on Credit.com.)
4. Refinancing Your Student Loans Can Save You Thousands
If you want to save thousands of dollars over the life of your loans, refinancing your student loans can be a solid option. Depending on your credit and income, it’s possible to get a much lower interest rate through refinancing.
Refinancing means taking out a new loan with a private lender to pay off your existing loans. The goal is to consolidate student loans, get a lower rate and/or secure a new repayment term.
The decision to refinance should be made carefully, however. Again, refinancing federal loans with a private lender means forfeiting many government-backed benefits.
Check with different lenders to see what rate you can get if you refinance. Also, consider your eligibility for income-driven repayment. Many high-earning professionals with a lot of student loan debt don’t qualify for income-driven plans. In such cases, it can make sense to refinance privately to take advantage of long-term savings.
5. Extra Payments Can Cut Years Off Your Repayment (& Save You Money)
Finally, making extra payments can help you save more money over time. If you don’t want your student loan debt hanging over your head, you can pay it off faster as your income increases.
Extra payments reduce your principal balance. That cuts down how much you pay in interest and the how long it takes to pay off your debt. Consider refinancing to a lower interest rate, then making extra payments to supercharge your savings and pay off your loans faster.
American consumers owe mountains of debt, but one of these mountains looms large over all the others: student loans. It’s astonishing to consider: Add up every auto loan in the country, and total student loan debt is bigger. Add up every credit card bill in the country, you only get about three-quarters of the way up the student loan mountain. Only mortgage debt is greater, but those with mortgages have homes to show for their debt. These days, many Americans aren’t really sure what they got in return for their oppressive student loan bills.
There is little disagreement that adult life in America without a college degree is a struggle, and it’s only going to get harder as the economy continues to modernize and manual labor continues to be devalued. So it’s imperative that America figures out how to educate its young people without bankrupting them — but it’s important to understand how we got here.
A History Lesson
In some ways, you can blame the Russians. Sputnik, and the Space Race, specifically. The federal government first got into the student loan business as a direct result of the USSR’s successful launch of Sputnik into orbit, and widespread fear that America was losing the Space Race. In fact, the law that created student loans was called The National Defense Education Act.
America has lent money to teenagers ever since, with the good intentions of helping them compete in the global economy. Today, some 44 million Americans owe student loan debt — a majority of college students graduate with at least some debt, and the class of 2016 had an average student loan debt of $37,000.
But even before the National Defense Education Act went into effect, America had committed to helping young kids who showed promise get college degrees. The federal government’s first real foray into pushing people towards college was The Servicemen’s Readjustment Act — the GI Bill — passed at the end of World War II. Colleges swelled as America repaid some of its debt to the Greatest Generation through free or discounted college.
By the 1950s, there were calls to extend what was generally considered a wildly successful program. But three terms in a row, a Senate-passed measure to increase federal funding for college died in the House. Then, on October 4, 1957, the Soviets sent shock waves through the country with their successful launch of Sputnik into space. That day Sen. Lister Hill (D-Alabama), chair of the Education and Labor Committee, read a memo from a clerk with a clever idea.
Hill latched onto the idea and National Defense Education Act was born.
Despite widespread public opinion demanding government action “in the wake of Sputnik” (the Senate history page’s words), House members were still resistant, calling federal college grants “socialist.” Other critics worried that the legislation interfered with the long-held principal that states and local communities were responsible for schooling. As debate progressed, supporters in the Senate offered a compromise: Much of the aid offered would come in the form of low-cost loans instead of grants.
That argument won the day. Dwight Eisenhower signed the National Defense Education Act in September 1958, 11 months after Sputnik’s launch. Uncle Sam was now a bank for college students.
Uncle Sam Becomes a Direct Lender to Students
NDEA loans are generally considered precursors to subsidized loans that became known as Perkins Loans.
That because it wasn’t long before the NDEA was expanded, and its inherent encouragement of defense-friendly subjects dropped. An amendment to the law signed by Eisenhower in 1964 increased funding, raised borrowing limits, and struck the provision that special consideration should be given to students who showed proficiency in math, science, engineering, or foreign languages.
By 1968, America had spent $3 billion extending student NDEA loans to 1.5 million undergraduate students.
In other words, Uncle Sam’s role as a direct lender for higher education was fairly well established by the time Lyndon Johnson’s Great Society ideas took hold. In 1965, the Higher Education Act included a further expansion of both loans and grants, this time aimed at lower-income Americans. The HEA established what we now know as the Free Application for Federal Student Aid (FAFSA), and directed the Department of Education to administer lending. Thus, the Guaranteed Student Loan (precursor to the Stafford Loan) was created.
HEA loans were different than NDEA loans in an important way, however. Students borrowed from banks, with the federal government acting only as a guarantor. That made Uncle Sam a co-signer, expanding the kind of funding available. (Since then, Congress has vacillated between preferring the co-signer role, and the banker role. Today, most federal loans are direct loans, but that could change again.)
Not surprisingly, college attendance soared, more than doubling from 1960 to 1970 (from 3.5 million to 7.5 million).
The Higher Education Act requires reauthorization every five years, each one a chance for Congress to change the law. Many of those provisions have been intended to expand the opportunities afforded by it. The 1972 Equal Opportunity in Education Act, known as Title IX, was passed to prevent discrimination based on gender. That same reauthorization also created the Student Loan Marketing Association (Sallie Mae), designed to encourage lending. In the 1980 reauthorization of HEA, PLUS loans were created, ultimately allowing parents to borrow money from Uncle Sam to pay for their kids’ college.
As Enrollments Rise, So Do Tuitions
Each loan expansion meant college attendance continued to expand, hitting 10.8 million by 1983. Today, it’s 20 million.
With more customers, and more funding, it should be no surprise that college tuition has soared right along with them. According to the College Board, annual tuition at a public (state) college averaged $428 in 1971-72. This year, it’s $9,648. During that same span, private tuition rose from $1,883 to $33,479.
So it should be no surprise that a chart showing the total outstanding student loan debt looks like a picture of the steep side of Mt. Everest. In 1999, former students owed $90 billion. By 2011, that figure had grown to $550 billion, an astonishing 550%. Since then, student loan debt has more than doubled … again.
It’s important to note, however, that while one theory holds that the history of ever-widening availability of credit has led directly to higher tuition costs and higher debt, that’s not the only possible explanation. Higher education advocates also point to reduced state government spending on state colleges. As one example, Ohio State received 25% of its budget from the state in 1990. By 2012, that percentage had fallen to 7%. Students, often via borrowed money, must pay the difference.
F. King Alexander, president of Louisiana State University, painted a bleak picture in testimony before a Senate committee during 2015. More generous federal loan programs created in the 1950s and 60s had an unintended consequence: They nudged budget-crunched state governments towards a dark solution.
“State funding for higher education sits currently around 48% to 50% below where it was in 1981,” he said. “It was assumed that any new federal funding policies would simply supplement state funding, not replace it.”
But, today, states are ”getting out of the higher education funding business, to the point that the federal government has now become the primary funding source,” Alexander said. And while schools, states, and the federal government argue about the higher math of higher education, many students are left with personal education budgets that just don’t add up. To put a fine point on it, attorney and student loan expert Steven Palmer offers this sobering example:
“In 1981, a minimum wage earner could work full time in the summer and make almost enough to cover their annual college costs, leaving a small amount that they could cobble together from grants, loans, or work during the school year,” he says in a blog on the topic. “In 2005, a student earning minimum wage would have to work the entire year and devote all of that money to the cost of their education to afford one year of a public college or university.”
A Longstanding (But Growing) Problem
It’s important to note that burgeoning student loan debt — and the inherent problems those bills present to borrowers and their families — did not go unnoticed until recently. In fact, back in 1987, a New York Times article summarized the issue in a paragraph that sounds an awful lot like something Vermont Sen. Bernie Sanders might have said during the 2016 Democratic Party primary races.
The growth of the problem is affecting not only individual lives, some authorities believe. They say the burden of debt is also chasing many students away from poorly paid public service jobs and forcing others to defer the start of a family and the purchase of a home or car, with economic and social consequences that have not been measured … Such cases worry education officials and other experts, who say that record borrowing for college threatens the financial stability of a generation of young people and their families.
At the time the article was written, the average debt for public college graduates was $7,000 ($15,000 in 2017 dollars). Since then, college tuition has risen at about four times the rate of inflation, and student debt, right along with it.
How Do We Fix Those Inherent Problems?
President Donald Trump did discuss the student loan problem on the campaign trail; his most significant proposal involved slightly more expensive, but also more generous income-based repayment plans for debtors. His plan would require 12.5% income contributions, but provide loan forgiveness earlier. The timetable for such a proposal is unclear.
The newly-minted head of the Department of Education, Betsy DeVos, said during confirmation hearings that the (then) $1.3 trillion in student loan debt is “a very serious issue,” but didn’t indicate support for any particular solution. In her testimony, there is this tea leaf:
There is no magic wand to make the debt go away. But we do need to take action. It would be a mistake to shift that burden to struggling taxpayers without first addressing why tuition has gotten so high. For starters, we need to embrace new pathways of learning. For too long, a college degree has been pushed as the only avenue for a better life. The old and expensive brick, mortar, and ivy model is not the only one that will lead to a prosperous future.
A comprehensive solution will almost certainly require another reauthorization of the Higher Education Act. The last reauthorization was signed by George W. Bush in 2008. It has been temporarily extended since then — Congress punted on a reauthorization during election season, which means it is overdue for another overhaul. DeVos told the Senate that she’s ready to get to work on that.
“I look forward to working with Congress and all stakeholders to reauthorize the Higher Education Act to meet the needs of today’s college students,” she said. The Education Department did not immediately respond to Credit.com’s request for comment as to whether there were any updates regarding DeVos’ plans since she testified.
Many issues remain on the table: Stakeholders are already arguing about enforcement of new rules against for-profit schools and the future of government direct lending vs. “co-signing” for borrowers. But the $1.4 trillion, 70-year-old problem is now an elephant in America’s living room — and no administration can make debt like that simply disappear.
What Can Students Do?
While solutions to the systemic student loan problem are unlikely to come to fruition overnight, there are some steps struggling borrowers can take to stay current on their payments — and to preclude that debt from harming their credit. (You can see how your student loans may be affecting yours by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
Federal student loans borrowers, for instance, can apply for a deferment or forbearance if they’re temporarily unable to repay those bills post-college. They can also apply for an income-based repayment plan that can help lower monthly payments to an affordable level. Private student loan borrowers may also have these options available to them, but it varies by lender and there may be fees attached to certain requests. (It’s best to ask about these options ahead of time — you can find more about vetting private student lenders here.)
There are also ways to lower the cost of your college education before and while in school. These options include looking into scholarships and grants, working part-time while taking classes and attending community college for few years before transferring to a four-year institution — more on how to pay for college without building a mountain of debt here.
But you might not know: Student loan forgiveness is often taxable.
These taxes can create huge hidden costs when the forgiven amount gets added to your tax bill.
Here’s what you should know about student loan forgiveness and taxes before you’re surprised with a tax bill.
You Could Be Hit With a Tax Bill
For many borrowers, income-driven repayment plans, such as Pay As You Earn, coupled with student loan forgiveness, can be financial saviors. These repayment plans cap your student loan payments each month at 10% to 15% of your income.
After some period—usually 20 to 25 years—of steady repayment, your remaining balance is forgiven.
However, there is an important factor to consider: Under current IRS rules, any loans forgiven under these programs are considered taxable income.
This means you could face a hefty tax bill when your loans are forgiven.
Let’s say that after making payments under an income-driven repayment plan for 25 years, you’re left with $40,000 in debt, which is forgiven. That $40,000 becomes taxable income.
In this case, your lender would send both you and the IRS a 1099-C form with the amount of debt forgiven—the same amount you’ll use when completing the necessary tax forms.
So while you might no longer have to pay back $40,000 in student loans, you’ll instead owe a big tax bill. That $40,000 in loan forgiveness could mean a $10,000-plus federal tax bill, which doesn’t include potential state income taxes.
If you can’t pay the tax bill, you could be forced to set up a payment plan with the IRS to resolve your tax debt. If you don’t take any action, you could face a penalty and have to pay interest on this debt.
And you thought your student lender was tough — imagine dealing with the IRS.
Possible Changes to the Current Tax Law
Lawmakers have discussed changing tax laws to get rid of the prospect of paying massive tax bills on student loans. Last year, U.S. Reps. Mark Pocan and Frederica Wilson introduced the Relief for Underwater Student Borrowers Act.
This act would exempt student loan borrowers in good standing with their repayment from being taxed on their forgiven loans.
Currently, only borrowers who qualify for forgiveness as a result of their jobs (e.g. teacher loan forgiveness or public service student loan forgiveness) are exempt from being taxed.
Pocan said the bill is important because it “closes a major gap in our tax code which penalizes some borrowers who have been granted debt relief after at least 20 years of consistent repayment towards their student loan debt.”
However, the bill has made little headway in Congress. Meanwhile, the student loan crisis continues to affect borrowers.
In the absence of a legislative fix, some borrowers can claim insolvency to avoid paying taxes on forgiveness. However, this likely only applies to a portion of borrowers who receive student loan forgiveness.
The laws may yet change as more people start to have their loans forgiven.
In the meantime, it’s crucial to understand the current tax law so that you can avoid unpleasant surprises in the future.
It’s also a good idea to see how your student loan is affecting your credit score. If you’re paying them back on time, it’s a way to boost your scores while you’re young. You can check two of your scores free, updated every 14 days, on Credit.com.
The average tax refund is more than $3,000. When you hear that number and do your taxes, only to find out that your refund is much less — or worse, that you owe money — it can be tempting to fudge the numbers and increase your refund.
But misrepresenting your income on your return counts as tax fraud, and has serious consequences. Below, find out what happens if you lie on your taxes and what IRS penalties you could face.
1. You Can Get Audited
Because the IRS gets all of the 1099s and W-2s you receive, they know if you do not report all of your income. Even if you accept unreported payments in cash or check, your financial activity can reveal red flags about what income you do not report, potentially triggering an audit.
An IRS audit is an extensive review of your taxes and financial records to ensure you reported everything accurately. Though most people have a less than 1% chance of being audited, it’s not worth the risk.
Undergoing an audit is a time-intensive and costly process that involves providing years of documentation and even in-person interviews. If the IRS audits you, you can (and probably should) hire a professional to represent you and your interests. While that’s a smart idea, it can be a pricey, unexpected cost.
While the IRS may have only flagged one return for audit, they can review any return from the past six years. If they find more issues, they can add penalties and fines for every year they find problems. If you made tax mistakes for the past several years, you could end up owing thousands for taxes you misrepresented.
2. Tax Fraud Carries Heavy Penalties and Fees
If the IRS does select you for audit and they find errors, the penalties and fines can be steep.
According to Joshua Zimmelman, president of Westwood Tax and Consulting, fudging your taxes to reduce your tax bill or boost your refund can cost you more in the long run.
“If you don’t pay your tax liability by the due date, the IRS will charge you a late payment penalty. Even if you file on time, you may still be charged a late payment penalty if you under report your income and the IRS finds out,” Zimmelman said.
And the penalty is just the start. The IRS can also charge you interest on the underpayment as well. “If you’re found guilty of tax evasion or tax fraud, you might end up having to pay serious fines,” said Zimmelman.
While tax evasion or tax fraud is normally imagined as something that affects high earners and big executives, even those with lower incomes need to be careful. When describing the penalties for tax fraud, the IRS does not differentiate between income amounts or how much you underpaid your taxes. If you falsify any information on a return, they can fine you up to $250,000.
3. Criminal Charges Are Possible
Besides potentially owing thousands in IRS penalties, fees, and interest, you could also face criminal charges.
“Tax fraud is a felony and punishable by up to five years in prison,” said Zimmelman. “Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”
Criminal investigations and charges start when an IRS auditor detects possible fraud during their audit of your returns. Courts convict approximately 3,000 people every year of tax fraud, signaling how serious the IRS takes lying on your taxes.
The odds of the IRS charging you for fraud is relatively small — if you’re investigated, the chances are less than 20 percent that you’ll face a criminal charge — but the potential consequences are severe. It’s not worth the risk to get a little extra money in your refund.
4. You May Miss Out on a Mortgage or Loan
Finally, not reporting all of your income can have serious ramifications when it comes to buying a car or a home.
“If you under-report your income, it might hurt you when you try to buy a house or apply for a personal loan,” said Zimmelman. “You might not get it if it looks like you cannot afford to pay it back, so lying on your taxes may hurt in that respect.”
When mortgage companies and banks review your application, they request copies of your tax returns to check your total income. If you lied about your income to lower your tax liability, your full income won’t be on the return. That means you may be denied for the loan you need, hurting your financial future.
Accurately Report Your Taxes
No one likes owing money at tax time or missing out on a big refund. But tax fraud is a serious criminal action, and glossing over your income or boosting your deductions counts as lying to the IRS.
Saving yourself a little money at filing time can end up costing you thousands of dollars with auditing, penalties, and fines. Save yourself the trouble and report your information accurately.
If you’re struggling with a medical emergency, unemployment or other financial crisis, making your student loan payments can be impossible. Rather than fall behind, you can opt to put your payments on hold through student loan deferment or forbearance.
Deferment is an option that lets you postpone both your principal and interest payments. If you qualify, you can pause payments for up to three years. Forbearance is more temporary — you can postpone or reduce your monthly payments for up to 12 months.
However, delaying your payments through deferment or forbearance can have serious financial repercussions. Depending on the type of loans you have, your loan balance can continue to grow due to interest and other fees.
Choosing Deferment or Forbearance
Below, find out how your loan type affects deferment and forbearance, and what alternatives you may have.
Deferring Federal Loans
With certain federal loans, you don’t have to worry about interest payments if you enter deferment.
If you have federal Perkins loans, Direct subsidized loans or subsidized Stafford loans, the government will cover the interest that accrues on your loans while your loans are in deferment. With your interest taken care of while you get back on your feet, you will have less to pay back in interest.
If you have unsubsidized federal loans or PLUS loans, the government will not pay for the interest that accrues during deferment. If you defer your loans, they will continue to gain interest, possibly causing your balance to balloon and costing you thousands. Not to mention your debt-to-income ratio will get worse, making it more difficult to qualify for new credit such as a mortgage or car loan. (Not sure where your credit stands? You can view two of your scores, with updates every 14 days, for free on Credit.com.)
Unlike deferment, your federal loans will continue to accrue interest in forbearance, regardless of the loan type. Because interest continues to build, entering forbearance can be costly, but it’s still better than missing payments and defaulting on your loans.
Is Deferment/Forbearance Available on Private Loans?
Technically, deferment and forbearance are federal loan benefits. Not all private loan servicers offer similar options — but some do. For example, SoFi offers deferment for students who are going back to school. And if you’re facing a financial difficulty, you may be able to enter forbearance for up to a year.
If you’re experiencing financial hardship, it’s worth asking your servicer if deferment or forbearance is an option. Just keep in mind that entering deferment or forbearance with private loans can be more expensive than federal loans. There are often fees you have to pay, and interest will accrue while you postpone your payments.
Alternatives to Deferment or Forbearance
If you want to avoid pausing your student loan payments completely, there are other ways to manage payments when they’re too high:
Income-Driven Repayment Plans
If you have federal student loans, you may be eligible for an income-driven repayment (IDR) plan. There are four IDR plans available today: income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).
Under each plan, the basics are about the same: The federal government extends your repayment term 20 to 25 years and caps your monthly payment at a percentage of your discretionary income. At the end of the term, your remaining balance (if any) is discharged. You still have to pay income taxes on the forgiven amount, however.
Enrolling in an IDR plan can drastically reduce your payments and give your budget more breathing room. Depending on your income and family situation, you may qualify for a payment as low as $0 per month.
Unfortunately, if you have private loans, your options are more limited. But one effective way to reduce your monthly payments is to refinance your debt. By refinancing, you take out a new loan that pays off your old private loans. Your new loan will have completely new terms, including — ideally — a lower interest rate.
Refinancing private loans can help lower your payments and help you pay less in interest over time. It’s a smart way to save money while giving yourself more room in your budget. Be sure to keep in mind that if you refinance federal student loans with a private lender, however, you forfeit federal protections such as IDR and deferment/forbearance eligibility.
Deciding What to Do in a Hardship
Student loan forbearance and deferment are useful options when you experience a financial hardship. If you’re facing an emergency and can’t keep up with your payments, deferment or forbearance can give you a much-needed break while you get back on your feet.
While entering deferment or forbearance is a much wiser option than defaulting on your debt, there are still consequences. Make sure you understand the financial impact of postponing your payments, as putting them off can add thousands to your student loan balance. And in the case of private loans, postponing may not be an option at all.
If you’re struggling to keep up with your loans, the most important thing is to be proactive and talk directly with your servicer to find out what options are available to you.
“I LOVE my student loan debt,” said no one, ever. Not only can student loan repayment be difficult to understand, it can crush your budget, and whenever there’s confusion and desperation, there’s someone trying to make money off it.
There are a handful of legitimate ways you can make your student loan payments more affordable, but it’s very likely you’ll come across student loan scams if you’re researching repayment options. These scams vary widely — some are looking to steal your personal or financial information, while others are trying to profit from high fees or misleading claims. Here are some red flags you need to watch out for.
1. It’s Too Good to Be True
The age-old scam identifier holds true for student loans: If it’s too good to be true, it is. Some common scams include terms like “instant forgiveness” or that you’re “pre-qualified” for lower loan payments, said Matt Ribe, senior director of legislative affairs and corporate secretary for the National Foundation for Credit Counseling. A company can’t know if you’re qualified for federal student loan programs like income-based repayment (IBR) or public service student loan forgiveness unless they’ve assessed your student loans and your personal financial situation. Ribe said to watch out for any broad, blanket guarantees that a company can get you a particular outcome — it’s really not that simple.
2. They Charge High, Upfront Fees
It doesn’t cost anything to apply for federal repayment or forgiveness programs (IBR, public service student loan forgiveness, revised Pay As You Earn aka RePAYE, etc.). You can do that through your student loan servicer (talking to your servicer is always free, too).
There are a lot of companies out there that charge fees for helping you apply for such programs.
“We pay people to fix our cars and prepare our taxes all the time; there’s nothing inherently wrong about that,” Ribe said. “It’s the misleading advertising that really irks consumer protection folks and the Department of Education, for sure.”
Joshua R.I. Cohen, a student loan lawyer in Vermont and Connecticut, said he’s seen student loan scams offer consumers “relief” and charge upfront fees between about $300 to $2,000. The company may not clearly explain what the fees are for — people often confuse monthly maintenance fees with their actual student loan payments — or they might just take your money and run. Your loans may not even qualify for a federal repayment program (private student loans don’t), but they’ll charge you a consulting fee anyway.
3. They Say ‘You Have To’
Any company that demands a specific form of payment (often paired with high-pressure sales tactics like, “This offer will expire at the end of the year!”), should make you suspicious, Cohen said.
You’ll also want to be wary of an offer that tells you how you should handle your loans, because it’s up to you to decide what makes most sense for your finances. For example, you generally do not need to consolidate your loans to qualify for IBR (except for Federal Perkins Loans, which must be consolidated to qualify for IBR).
“The scam company doesn’t say why you need to consolidate they just say, ‘Oh you need to do this,'” Cohen said.
4. ‘The New Obama Student Loan Relief Program’
Both Cohen and Ribe cited this one. You may have even seen ads for it online.
They say something like, “‘By consolidating you can qualify for the Obama Loan Forgiveness Program’ — there is no Obama Loan Forgiveness Program,” Cohen said.
Falling for this one may mean you pay a fee or you end up “consolidating” into a loan with murky terms and a high interest rate — all for a program that doesn’t exist.
Also watch out for companies claiming to be affiliated with the government or the Education Department — only student loan servicers and debt collectors work directly with the government.
5. They Want to Take Control of Your Loan
Cohen and Ribe said there’s no reason to pay your loan through a third party. Scam companies have been known to ask for your Federal Student Aid ID (FSA ID) or your National Student Loan Data System (NSLDS) PIN. This is personally identifying information that can allow a third party to take control of your loan.
“You don’t know what the company is actually doing, (or) if they’re actually forwarding the money onto the servicer,” Ribe said. The company may also change your contact information on your student loans, so you won’t know if you miss payments or default.
Why You Need to Be Careful With Student Loan Repayment
If you ever have questions about your student loan payments, you can ask your student loan servicer for guidance. The Education Department, the Consumer Financial Protection Bureau and local consumer advocates (like a student loan lawyer or a non-profit credit counselor) are also good sources.
The Federal Reserve’s benchmark interest rate is on the rise. These rates already increased once in December, and experts are predicting another three rate increases for 2017.
This could mean more earnings on your savings, but it could also mean higher interest on your debt. While that’s hardly a welcome announcement for anyone paying down debt, it’s not all bad.
Federal Rates on the Rise
You might be wondering why, in a time of deep student loan debt, the Federal Reserve would consider raising its rate. According to Janet Yellen, the Fed’s chairwoman, the rate increase is “a vote of confidence in the economy.”
This is because the Fed decreases its benchmark rate during times of economic uncertainty. Since the Great Recession, rates have been historically low to give borrowers a chance to get out from underneath crushing debt. But as the economy improves, the rate needs to increase to prevent inflation.
In short, a higher federal benchmark interest rate means a strengthening economy. But what does it mean for your student loans? That answer will depend on the kind of student loans you have.
Fixed-rate student loans have interest rates that remain the same for the entire repayment period; they don’t change with the market. So let’s say you took out a 10-year student loan with a fixed rate of 6%. If the Fed raises rates today, your student loan interest rate will remain 6% until the loan is paid off. However, anyone who takes out a new loan after rates increase could end up with a higher rate than you.
If you have a private student loan, on the other hand, it could have a variable interest rate. Variable rates are tied to the market and can increase or decrease according to federal rate changes. How much and how often the rate changes is up to the particular lender.
If you’re wondering whether the rates on your student loans are fixed or variable, read your statements to find out. While you don’t have to worry about federal fixed-rate student loans, there’s no telling how much a variable-rate loan might increase. The Fed’s rate is a benchmark, but it’s entirely up to banks and lenders where to go from there.
How to Handle Rising Rates
If you have variable-rate student loans, it might be a good idea to do something now in case of potential increases. Here are a few things you can do to get ahead of the curve.
1. Look Into Refinancing
If you’re worried about any variable rates on your private student loans rising, refinancing can be a good strategy for lowering your rate as well as switching to a fixed-rate loan.
Currently, it’s only possible to refinance student loans through a private lender. That means refinancing federal student loans would result in some drawbacks, including the loss of federal loan protections such as forbearance, deferment and forgiveness.
In this case, however, there’s no need to refinance federal student loans; refinancing private variable-rate loans is what will protect you against future rate increases.
2. Strategize to Pay Your Loans Off Faster
If your rates are already as low as possible, an interest rate hike might be good motivation to get ahead of your debt.
Of course, you might not have the extra cash to pay off your loans faster. Instead try making bi-weekly payments: Split your monthly payment in half, and apply that amount to your loans every other week.
Why? This will result in making one extra payment per year without taking a huge chunk out of your budget. Just make sure your first two bi-weekly payments hit your account before the next month’s due date. You want to avoid accidentally paying less than the minimum.
3. Communicate With Your Servicer
If the interest rate on any of your student loans does increase and your monthly payment grows beyond what you can afford, contact your loan servicer immediately.
It can be a scary step to take, but it’s far more helpful than ignoring an impending issue. Missing payments on your student loans risks going into default, taking a big hit to your credit score — or even having your paychecks or tax refund garnished. Most lenders would rather work with you to come up with a payment plan, so find out what your options are right away. (Not sure where your credit stands? You can view two of your credit scores, with updates every two weeks, on Credit.com.)
Whatever You Do, Don’t Panic
Anyone with student loan debt can speak to the way it seems to affect every aspect of life. That’s why news of things like an interest rate hike can be so worrisome. But if you’re feeling nervous right now, don’t panic.
When the Fed raises rates, it does so incrementally. Though your lender doesn’t have to follow suit with an incremental increase, you probably won’t see a massive jump in your current rate. Until you know what your lender is going to do, stay calm and keep making those payments.
Use these tips to help you get out from under the rock of student loan debt. No matter what the Fed does to its benchmark interest rate, you’ve got this.
Paying interest is no fun. But if you have student loan debt, you don’t have much choice.
Wouldn’t it be great if the government gave you a break on that student loan interest you pay each year?
Well, here’s some good news: You might be able to deduct a portion of student loan interest from your taxable income — up to $2,500 — thanks to the student loan interest tax deduction. Find out if you qualify for this deduction and learn how to claim it below.
How the Student Loan Interest Tax Deduction Works
The IRS lets you claim the student loan interest tax deduction on Form 1040, Line 33. Because it’s considered an “above the line” deduction (i.e., an adjustment to your income), you don’t have to itemize your taxes in order to claim it.
Keep in mind, this is a deduction and not a credit. That means claiming this deduction will reduce your taxable income by up to $2,500. In terms of real dollars saved, your total tax bill could be reduced by up to $625, depending on your income and how much student loan interest you pay.
Who Qualifies for the Deduction?
There are three qualification criteria you need to meet in order to claim the student loan tax deduction:
Have a Qualified Student Loan: First, you need to have a qualified student loan. The IRS says that the loan must be taken out to pay for qualified education expenses. Not only that, but it can’t be a loan from someone related to you, or provided as part of a qualified employer plan. So, if your grandma offers you a loan for your education, and you pay interest to her on top of making principal payments, you can’t deduct that interest. The same is true if your employer offers student loans as part of a company benefit. Only loans from the federal government or a private lender will qualify.
Be a Qualified Student: Next, the loan must be taken out on behalf of a qualified student in order to deduct the interest. The student can be you, your spouse, or your dependent. So, you can still deduct student loan interest from your income, even if the loan is financing your spouse’s or child’s education and not yours. However, no matter who that student is, they must have been enrolled at least half-time in a program at an eligible educational institution when the loan was taken out. The program should lead to a degree, certificate, or other recognized credential.
Meet Income Requirements: Finally, there is an income requirement. The IRS won’t let you claim the student loan interest deduction if your modified adjusted gross income (MAGI) is at least $160,000 if married filing jointly or $80,000 for other filing statuses.
To see if you qualify and find out how much you might personally save on your taxes, you can use a student loan interest deduction calculator to run the numbers.The IRS also offers a handy tool to determine if you qualify for the deduction. It takes about 10 minutes to complete.
How the Deduction Impacts Your Tax Bill
Realize that a tax deduction reduces your income; it doesn’t mean a dollar-for-dollar reduction in what you pay in taxes (that’s a credit). With a tax deduction, your tax bill is smaller because your taxable income is lower.
In the case of the student loan interest tax deduction, the maximum tax benefit is $625. Your actual tax benefit is determined by your income, filing status, and how much you paid in student loan interest.
Say you file single, your MAGI is $45,000, and you paid $800 in student loan interest. Your income might be reduced by $800, but the actual impact on your taxes is to lower what you pay by $200.
It’s still a reduction in what you owe, and when you combine the student loan interest tax deduction with other deductions and credits, it can make a big difference in your final tax bill (or refund).
How to Claim the Student Loan Interest Tax Deduction
Start by taking a look at how much you paid in interest (not your total student loan payments). That information can be found on Form 1098-E. Each of your student loan servicers should send you a copy. You can find the interest you paid in Box 1.
Add up the amounts from all your forms and enter it on your tax form in the appropriate place. However, you might need to make sure you meet the income requirement.
According to the IRS, your MAGI is basically your adjusted gross income (Line 37 of the Form 1040) after adding back in certain deductions. Some of the deductions you add back in include:
Student loan interest
One-half of your self-employment tax
Tuition and fees deduction
IRA contribution deduction
Certain investment losses
Exclusion for adoption expenses
For example, your adjusted gross income might be $40,000. However, you claimed $3,000 in IRA contributions and $1,000 in student loan interest. Plus, your side gig meant a self-employment tax deduction of $500. That’s $4,500 in deductions. To calculate your MAGI, add that $4,500 back to your adjusted gross income. You end up with a MAGI of $44,500.
As long as your MAGI meets the IRS income requirements, you can still claim the deduction. If all those deductions you’re claiming put your MAGI over the top, you have to erase the deduction from your form.
The student loan interest tax deduction can be a great way to reduce your taxable income and lower your tax bill. It’s best used in conjunction with other tax breaks, so consider consulting a tax professional to find out how to best take advantage of all your options. You can find a quick guide to other common tax deductions and exemptions here.
With so much debt, many college graduates have delayed major life milestones such as getting married, buying a house, traveling, and starting a business.
But it doesn’t have to be that way.
Although student loans can be a financial burden, you can still follow your dreams. Here’s how to get one step closer to living the life you want by reaching these four goals.
1. Getting Married
A 2013 survey by the American Institute of CPAs found 15% of respondents had delayed getting married because of their student loan debt. But getting hitched when you have student loan debt isn’t totally impossible.
One of the biggest reasons people delay marriage is the high cost of weddings. In fact, the average wedding costs over $32,000, according to The Knot. If you have student loan debt, that expense can hurt your finances deeply, reducing your chances of getting rid of your debt sooner rather than later.
But there’s no law that says you need the elaborate ceremony, giant guest list, and pricey dress. Getting married can actually be a simple and inexpensive celebration. An afternoon ceremony and a simple dinner can make getting married a financial reality, rather than waiting until you pay off your student loans.
2. Buying a Home
For many, breaking the renting cycle and becoming a homeowner is a significant life goal. But some may feel that student loan payments make it impossible to get approved for a mortgage, let alone afford one. (Keep in mind that while your student loan balances won’t necessarily keep you from qualifying for a mortgage, your credit can. You can see how your student loan payments and other credit accounts are affecting your credit by getting your two free credit scores, updated every 14 days, right here on Credit.com.)
Don’t let student loans ruin your dream of buying a house. If you know you can afford the payments, but are struggling to get approved for a mortgage because of your outstanding debt, consider refinancing.
Refinancing student loans at a lower interest rate will reduce your monthly payments, freeing up more cash to put towards student loan debt, as well as lower your debt-to-income ratio. Keep in mind, there are some potential drawbacks to consider when refinancing federal student loans. Even so, this tactic can make you look like a better borrower in the eyes of mortgage lenders.
3. Taking a Vacation
If one of your passions is exploring the world, don’t let student loans hold you back. The best way to travel abroad while keeping up with your student loans is to find ways of earning extra income.
If you can, pick up a side hustle or second job to help bolster your emergency fund. Once you have built up a good nest egg, you can set up automatic payments on your student loans. Then you can travel without worrying about paying down your debt on time.
4. Starting a Business
Launching a business when you have student loans can be challenging, but it is doable. There are ways to become an entrepreneur and still keep up with your loan payments.
Try moonlighting while working full-time to get your side business started. This approach is a smart way to minimize the risk of starting your own company. You’ll still bring in a regular salary, ultimately building your business without risking your income.
Once your business is off the ground, you can minimize your expenses and free up cash by refinancing your loans or signing up for an income-driven repayment plan that will reduce your federal student loan payments. You’ll likely get a lower interest rate and lower monthly payment after the process is done which will make your loans more affordable as your business continues to grow.
Managing your student loan debt can be a real challenge, but it’s no reason to put your life on hold. With some research and preparation, you can accomplish any of these life goals while still managing your loans successfully.