Wealth Club: How to Navigate the Grad School Debt Dance

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Wealth Club: How to Navigate the Grad School Debt Dance Wealth Club: How to Navigate the Grad School Debt Dance
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Wealth Club: How to Navigate the Grad School Debt Dance

by Michael Fleck

April 2, 2012

There are also income-based repayment plans. It’s worth seeing if you qualify for these plans, as they could allow you to have at least some of your total debt canceled. After 25 years of paying what you’re deemed capable of paying, the remainder of your debt is canceled. If you work in public service, that process only takes 10 years.

Turn multiple monthly payments into one

Consolidating your federal loans can be a convenient and prudent option for some borrowers, allowing you to combine your individual loans into just one monthly debt service payment. The government’s page on cancellation and consolidation directs interested parties to the Direct Loan Consolidation Center for more information. You generally cannot consolidate private loans together with federal loans.

I recently called my student loan servicer, Sallie Mae, to ask about consolidating. I was told that it wouldn’t be a good option. Of my four undergraduate Stafford (federal) loans, three have an interest rate of 1.76 percent; the other, 6.8 percent. The friendly woman on the phone informed me that even though the new interest rate is a weighted average, the combined interest rate tends to be a little higher than an actual weighted average. I decided instead to scrounge up the funds to pay off that one pesky, expensive loan.  

Why can’t every season be tax season?

As I hinted a few weeks back, going back to school can be quite advantageous for tax purposes. Interest you pay on student loan debt is deductible, even if you take the standard deduction. Depending on if the loans were for undergraduate or graduate, as well as your taxable income, you may be able to use one of three tax treats:

1)     American Opportunity Credit-A tax credit, up to $2,500 (reached if you paid $4,000 or more) toward post-secondary education only—sorry graduate students. This is mostly for parents.

2)     Lifetime Learning Credit—A tax credit, up to $2,000 (reached if you paid $10,000 or more), which can be used for undergraduate or graduate education expenses. Your taxable income must be under $60,000, but there’s no limit to the number of years you can take it. None of it is refundable, so it can only bring your tax bill down to zero, it can’t get you a refund.

3)     Tuition and Fees Deduction—A deduction to your income rather than a tax credit, for those with taxable income under $80,000. You must itemize your deductions to take this.

Default isn’t as dire as you may think

If there’s absolutely no way you’ll be able to pay back your student loans, I’m guessing your money woes don’t stop there. You may be on the brink of bankruptcy, and yes, the nasty rumors are (mostly) true. Student loan debt, both federal and private, is not dischargeable in bankruptcy. Unless you can show a court—through a totally separate proceeding than the actual bankruptcy hearing itself—that paying back your student debt would put an “undue burden” on you and your dependents, it won’t be discharged. If you’re living under a bridge eating dented cans of tuna—not the tuna, the actual cans—there may be a light at the end of the tunnel, as long as these loans are causing you to be unable to afford basic human needs. Otherwise, you own these loans, and they’ll need to be paid back. So don’t wait. Find the right payment plan and build it into your monthly budget. Now, go learn something!

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