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Student Loan Debt and Default: Don’t Sacrifice Your Credit
E
arning a college degree
used to be the default route
to a secure future. However,
the financial crisis of the last five
years has thrown a wrench into the
works. Parents have found them-
selves unable to assist with
tuition, cuts in state funding mean
fewer grants and scholarships
available, and students are turning
to government-backed student
loans to finance tuition and make
ends meet.
New graduates are also discov-
ering jobs are scarce. As a result,
student loan debt and default are
at historic highs. The average col-
lege student who graduated in
2011 had $26,600 in student
loans, according to the Institute
for College Access and Success.
There are many factors that have
caused this high student loan debt
and default scenario. Students and
their parents need to understand
the ramifications of defaulting on
a student loan. In addition, parents
need to think carefully about co-
signing for a student loan and
what that could mean to their own
financial future.
Should You Co-Sign?
Your child has admirable goals:
to attend a four-year college.
However, your child also wants
you to co-sign for their student
loan. How do you say no to that?
Before you say yes or no, you
need to educate yourself. If your
son or daughter ultimately can’t
keep up with their loan payments,
their loan will become your loan.
If you can’t afford to make the
payments, your credit report is
going to take the hit.
Only private student loans, such
as those through a financial insti-
tution, can require co-signers.
Federal student loans – 93 percent
of student loans are now issued by
the government – do not require
co-signers. These government-
backed student loans typically
offer lower interest rates and more
flexible repayment plans. Investi-
gate all of your options available
before co-signing anything.
Defaulting on a Student
Loan
If you or your child does default
on a student loan, the government
isn’t just going to let either of you
walk away. There are many steps
they can take to recoup their
losses:
• Tax Refund Offsets: The IRS
can hold onto any income tax
refund you may be entitled to until
your student loans are paid in full.
• Garnishment of Wages: The
government can garnish (take) a
limited portion of the wages of a
student loan debtor who is in
default. It can take up to 15 per-
cent of your disposable income.
However, it cannot take more than
the equivalent of 30 times the
current federal minimum wage.
• Your Federal Benefits The
government can take some federal
benefit payments (including
Social Security retirement benefits
and Social Security disability ben-
efits, but not Supplemental Secu-
rity Income) as reimbursement for
student loans. The government
cannot take any amount that
would leave you with benefits less
than $9,000 per year or $750 per
month. And, it cannot take more
than 15 percent of your total
benefit.
• Legal Action The government
and private lenders can sue you to
collect defaulted student loans.
Unlike other debts, there is no
time limit on suing to collect stu-
dent loans – you can be sued
indefinitely.
In the Event of Bankruptcy
If you’re having trouble repay-
ing your loan, the first thing you
should do is contact your student
loan lenders to see if you can
arrange an easier repayment plan.
If you’re having serious trouble
paying back your debt, bankruptcy
isn’t going to be an easy alterna-
tive. Unlike credit card debt or
automobile loans, student loans
are virtually impossible to dis-
charge in bankruptcy, even after
declaring bankruptcy. Unless you
can show that your education loan
payment is an “undue hardship”
on you, your family, and your
dependents, your student loans are
ineligible for cancellation (dis-
charge) in bankruptcy. It is diffi-
cult to prove “undue hardship”
unless you are physically unable
to work and there is no chance of
your making money. To discharge
your student loans under this spe-
cial case, you must file a separate
motion with the bankruptcy court
and present your situation before a
judge.
If your student loans are the
largest part of your debt, you are
better off not filing for bankruptcy
because courts are very reluctant
to discharge student loans.
Dollars & $ense is a regular col-
umn on personal finance prepared
and distributed by certified public
accountants from the Oregon
Society of CPAs (www.orcpa.org).
For more money tips from CPAs,
read the Oregon Saves blog at ore-
gonsaves.orcpa.org
How Did the Fiscal Cliff Deal Affect
Your Taxes?
R
emember all the talk about
the impending fiscal cliff a
couple of months ago? The
fiscal cliff problems involved a
list of expiring tax issues and con-
gressionally mandated spending
cuts. The expiring tax issues, at
least, were mostly addressed in a
new law, the American Taxpayer
Relief Act of 2012, which made a
number of changes in existing tax
rules, while also maintaining
some important rules that have an
impact on many taxpayers. The
Oregon Society of CPAs offers a
rundown of what you need to
know about the new rules this
year.
As of January 1, you may have
noticed a slight drop in your take-
home pay. That’s due to the expi-
ration
of
an
existing
two-percentage-point cut in the
employees’ portion of the Social
Security payroll tax, returning it to
6.2 percent on income up to
$113,700 in 2013. A couple with
each spouse earning $50,000 will
see their total taxes go up $2,000 a
year as a result. In addition, some
taxpayers may also be paying a
new .9 percent Medicare surtax on
income in excess of $250,000.
Most Americans’ tax rates
remain the same under the law for
2012, but, beginning in 2013,
there is now a new 39.6 percent
rate for many high-income indi-
viduals, as well as a higher rate on
Page 8 The Portland Skanner
March 13, 2013
capital gains and dividends, plus a
new 3.8 percent addition to
income tax rates on Net Invest-
ment Income. In addition, the
phase-out levels for personal
exemptions and itemized deduc-
tions have gone up for some high-
er-income taxpayers.
Many middle income taxpayers
have increasingly been threatened
by the alternative minimum tax—
or AMT—an alternate tax that was
actually created to prevent high
income individuals from avoiding
taxes. The problem was that the
AMT threshold was never adjust-
ed for inflation, even as inflation
pushed more middle income peo-
ple into its range. Congress has
generally passed last-minute
patches addressing the problem
every year, but the new law per-
manently indexes the AMT to
inflation.
The new law brought at least
some temporary stability to estate
and gift taxes, but long-term plan-
ning is still necessary. Under the
law, the estate and gift tax exclu-
sion remains at an inflation-
adjusted $5 million indexed for
inflation ($5.12 million in 2012
and $5.25 million this year). The
top tax rate was raised to 40 per-
cent from 35 percent as of January
1, 2013. However, those rules are
set to expire at the end of this year.
Read the rest online at
www.theskanner.com