The Student Loan Trap
Posted on February 19th, 2016 in Uncategorized

The Student Loan Trap

March is less than 2 weeks away. While we gleefully await spring break time to arrive, we came across 2 interesting stories that removed our spring time joy. Both stories involve student loan debts and no, you cannot get rid of them.

The first story revolves around a 48 year-old Houston resident named Aker, who was greeted by US Marshals in SWAT gear last week for an unpaid $1,500 student loan from 1987. Aker was arrested and taken to a holding cell at federal building. Later he met with a judge where he was ordered to pay the outstanding loan plus interest plus the cost of the arrest. He was informed that if he did not pay, he could be arrested again.

Scary and surreal? So the moral of the story is to pay your student loans on time and do not try to out-smart federal government. But what if you, like many other, cannot afford to pay large student loans after graduating? Which brings us to our second story.

In 1994 Congress created an income-driven student loan repayment program.  The basic concept under this plan is that a borrower can adjust the monthly payments based on their income and the balance will be written off after 20 or 25 years.

This sounds great until you get that 1099-C. 1099-C is a document that you will see when you have any debt more than $600 cancelled. According to the IRS that forgiven debt is income to you and you are liable for taxes on that so called “income”.  Depending on the type of income driven repayment amount, after 25 years a $145,000 loan could grow to as much as $400,000 because of all the accrued interests that were not covered by your monthly payment. The end result is a tax bill that can be more than the balance of the original debt.

As of last year, there were over 4.2 million people enrolled in the federal repayment program.  In 2019 the first people enrolled in the income-driven repayment programs will have their debts written off and possibly the largest tax bill in their entire life!

We understand that student loan debts are necessary-evil. But aren’t there some alternate measures available to avoid the student loan repayment trap? Glad you asked. In our next blog post, we will discuss some measures available. Stay tuned.

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