4 Things Most Americans Don't Know About Student Loans
Student loan debt can seem straightforward: Borrow money, make monthly payments after graduation and eventually pay off the balance. But the rules around student loans are far more complicated than most borrowers understand.
Here are four things millions of Americans don’t know about student loans.
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Your Employer May Be Able To Pay $5,250 of Your Student Loans Tax-Free
An employer can do more than just increase your salary to improve your finances. Some companies help employees pay off student loan debts without increasing their tax bills.
Patricia Roberts, chief operating officer at Gift of College, Inc. and author of “Route 529,” said section 127 of the Internal Revenue Code allows employers to contribute up to $5,250 per year per employee toward student loan repayment tax-free.
“When payments are made, no tax is owed by the employer or employee, and the employer can also take a business tax deduction," Roberts explained.
Not all employers offer student loan assistance programs, so Roberts suggested asking whether it’s part of their benefits package or if it’s something they’re willing to add. Also, when hunting for a new role, “Check the benefits carefully to see if student loan repayment is available.”
Student Loans Aren’t Always Impossible To Discharge in Bankruptcy
You've probably heard that student loan debt follows you forever, even through bankruptcy.
However, “Federal and private student loans can be discharged under the Bankruptcy Code’s undue-hardship rules, which require a borrower to file a separate adversary proceeding and prove that repaying the loan(s) would create an undue hardship on the borrower,” said Casey Yontz, bankruptcy attorney and founder of USBankruptcyHelp.
Yontz also pointed out that borrowers shouldn’t assume that loans deemed as “student loans” automatically get special protection from bankruptcy discharge. He said loans for covering living expenses or bar study rather than tuition may not legally qualify as student loans, making them easier to discharge.
Federal and Private Student Loans Have Different Borrower and Protection Rights
Federal and private student loans borrowers don't necessarily have the same options when financial trouble hits.
“Federal loans may provide access to benefits like income-driven repayment, public service loan forgiveness, deferments, forbearances, and rehabilitation after default,” Yontz said. “Private loans don't automatically come with these benefits, and the borrower's rights depend on their contract with the lender.”
That difference is especially critical when refinancing. Refinancing federal student debt with a private lender could get you a better interest rate, but you’ll also have to replace federal loans with private debt and lose federal protections.
So before you refinance, think about the potential interest savings and weigh it against the protection benefits you’ll lose forever.
Defaulting on Federal Student Loans Hits Differently Than Other Debt
Defaulting on a federal student loan isn’t the same as defaulting on a credit card. The government can garnish up to 15% of wages and offset tax refunds without going to court, powers private creditors don’t have.
“That is why I tell borrowers not to ignore a federal student loan simply because they cannot afford the payment,” Yontz said. “There may be options available before default that become much harder to navigate after collection begins.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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