Even though to me it seems like summer is just getting started, some colleges are starting up again in only a month. This is the season when thousands of families are signing up for student loans. Personally, I don’t think loans are necessary to earn a college degree, but a lot of people still use them.
If you or your child are planning on attending college this fall and using loans to do so, you need to know what you’re getting into. Here are three very important things for you to understand before taking out student loans:
1. Student Loans Cannot Be Discharged In Bankruptcy
Bankruptcy is the legal process where all of your debts are erased and you get to start over with a clean slate. Unless you have student loans. Those can’t just be wiped out the way medical bills and credit card debt can.
The only way to have student loans discharged in bankruptcy is by proving “undue hardship.” If you go as a missionary to Cambodia or can’t get a job that pays more than minimum wage, that won’t cut it. “Undue hardship” is something more along the lines of being left paralyzed from the neck down in a car accident. In most cases, paying the debt is preferable to the “undue hardship.”
2. Student Loan Forgiveness Is Taxable
It seems that student loan forgiveness is the next great thing to aspire to after a college degree. The growing student debt in the US today has led to more and more student loan forgiveness programs. If you are able to get your loans forgiven, that’s great. But, there’s one little catch.
Having your student loans forgiven is a taxable event. Wait, what does that mean? That means the government considers whatever amount is forgiven as income for you. And they tax your income.
Let’s say you pay 25% taxes and have a $40,000 student loan. What happens if you get it forgiven? You end up owing $10,000 in taxes! You simply go from owing Sallie Mae to Uncle Sam.
Before you start whining about how unfair that is, remember: you’ve still just had $30,000 of debt erased. When was the last time someone walked up to you, gave you a $30,000 check, and you whined about it?
The taxes related to student loan forgiveness take most people by surprise. If you are planning on taking advantage of a student loan forgiveness program, have a plan to pay the taxes as well. If you don’t have the money, you will have to get on a payment plan with the IRS. And when you owe the IRS, you’d better take it seriously, because they don’t mess around.
3. You Will Be Offered More Than You Need
Just like with mortgages, you can be approved for much more in student loans that you really need. Your kid doesn’t need the newest laptop and spring breaks in Cabo. Sure, the government is willing to finance it, but you will all end up better off if he gets a part time job instead.
Just because a lender offers you something, doesn’t mean you need it. When your beloved 18-year-old explains why she needs to go to the coolest out-of-state school with her best friend, look deep into those big puppy-dog eyes and see her as a 22-year-old, forced to take a job she hates (or delay starting a family) because she is strapped with a huge student loan.
Protect your and your child’s future. Don’t take out student loans haphazardly. Know what you’re getting yourselves into before you sign the dotted line.