Students graduating from college typically leave with significant student loan debt. Understanding their options to manage that debt effectively is essential.
Learn about federal repayment and forgiveness programs such as time-limited payment pause, PSLF, IDR and other forgiveness options available to borrowers, along with strategies that may help save them money while paying back student loans.
Student Loans & Taxes
With student loan debt taking a significant chunk of many paychecks, reaching financial goals may seem impossible. Luckily, there are ways to make debt more manageable and potentially even have part or all of it forgiven at some point in the future.
But loan forgiveness programs come with one major caveat: forgiven debt will count as income and could create an unexpected tax bill when it’s time to settle up.
Consider whether your loans are federal or private and whether they were obtained via government channels or lenders such as Sallie Mae. In addition, find out whether they feature fixed or variable interest rates as well as what type of repayment plan applies.
Colleges and employers provide loan repayment assistance programs, while the government also offers options such as forbearance or even forgiveness for graduates working certain public service jobs.
Paying Off Student Loans
Student loans can drain your paycheck. By paying off loans early, you can reach other financial goals more quickly and improve your debt-to-income ratio when applying for mortgage or credit card financing.
If it is feasible, making payments beyond your minimum monthly installment could help accelerate repayment timeline and decrease interest costs. A student loan calculator can show you how additional payments could speed up this process and cut interest costs down significantly.
Find out if your employer offers benefits that make repaying loans more likely, or whether or not you qualify for federal loan forgiveness programs like Public Service Loan Forgiveness and Local Loan Assistance Programs. While Public Service Loan Forgiveness has become the most well-known of these, many states also provide their own versions such as Loan Assistance programs which often target specific career paths like doctors, nurses and teachers – check with the education authority in your state to discover more!
Taxes on Student Loans
If you have student loans, loan forgiveness could be available. But before taking advantage of this benefit, make sure you understand how it will impact your state income tax return – this depends on whether the loans were federal or private and whether their balances were forgiven under specific programs such as Public Service Loan Forgiveness.
Federal borrowers enrolled in income-driven repayment plans — which calculate monthly payments based on income — should be fine; those not participating could be caught off guard by state income tax bills, according to CNBC.
Good news is that most states with income taxes adhere to federal definitions of taxable income and do not consider forgiven student debt earned income, such as Mississippi and North Carolina. Therefore, it’s wise to consult an expert about your individual circumstances – Laurel Road consultants can review loan histories and assist in creating plans to address them.
As there are several loan forgiveness options available to help manage your debt, such as deferments, income-based repayment plans and student loan forgiveness programs, it may help ease your burden of debt. Extending your term may reduce monthly payments while increasing total interest costs over time.
As well as federal loan forgiveness programs, state programs also offer loan assistance or forgiveness. While such initiatives often target medical professions and teachers in low-income communities, other professionals may benefit as well.
An alternative option is setting up automatic payments with your lender, which can help prevent late fees and protect your credit score from becoming damaged by late fees and missed payments. Failing to repay debt could have lasting repercussions and hinder future loan applications or mortgage applications, so it is wise to stay current on student loan repayments while building an emergency fund in case job loss or unexpected expenses occur.