Tag Archives: student loan debt

Tax Tips: Student Loans and Your 2013 Tax Return

Tax Return 1040As you get ready to file your 2013 tax return, review these tax tips if you have student loan debt. Understanding how taxes and student loan payments intersect could help you save money. And if you will soon pay off a student loan with forgiven principal, you might need to prepare yourself for a tax hit.

Tax Tip 1: You Might Be Able to Deduct Interest on Student Loan Payments

If you paid interest on student loans during 2013 and your modified adjusted gross income (AGI) is less than $75,000 if you are single, and less than $155,000 if you are married filing jointly, you can deduct up to $2,500 on your 2013 federal taxes. (There is no deduction if you are married filing separately.)

The amount you can deduct depends on:

  • How much student loan interest you paid.  If you paid less than $2,500, then your deduction is limited to the amount you actually paid.
  • How much income you earned. If your AGI is between $60,000 and $75,000 for singles, or between $125,000 and $155,000 for married couples filing jointly, the IRS prorates your deduction.  This means your deduction will be lower than if your income was less than $60,000 (single filing) or $125,000 (married filing jointly).

For details on the formula for determining your tax deduction, what counts as a student loan interest, and examples of how this works, see Nolo’s article Tax Deductions for Student Loans.

Tax Tip 2: Filing Status Can Reduce Your Future Student Loan Payments

If you are married and are paying student loans under one of the federal income-driven student loan repayment programs, your filing status can affect your student loan payment amount for the next year.

Under the federal Income Contingent Plan (ICR), the Income Based Plan (IBR), and the Pay as You Earn Plan (PAYE), the amount of your student loan payment is based on your income, family size, and basic living expenses. Each year, the loan servicer uses the information in your tax return to reset the amount of your student loan payment. (Learn more about how these repayment plans work in Nolo’s article What’s the Difference Between Income Contingent Repayment Plans and Income Based Repayment Plans?)

If you are married and file a joint tax return, your loan servicer will consider the income of both you and your spouse in setting your student loan payment  amount. But, if you are married and file a separate tax return, your loan servicer will consider only your income when setting your student loan payment amount. If your spouse’s income is significant, filing separately could reduce your student loan payment for the next year.  (For more information and examples of how this works, see Nolo’s article Tax Filing Status and Student Loan Payments.)

Tax Tip 3: If You Have Forgiven Student Loan Debt, You Could Face a Tax Hit

If you enter into one of the federal flexible student loan repayment plans, such as ICR, IBR, or PAYE, your student loan payment is determined by your income. After you have made payments for the full loan term (which can be up to 30 years), if any debt remains, the federal government will forgive it.

The problem, come tax time, is that the IRS treats forgiven debt as income. If the forgiven student loan amount is more than $600, your loan servicer will send you a 1099-C and you’ll have to report the forgiven debt on your tax return as income. This can result in a hefty tax increase.

Fortunately, there are some exceptions to this tax rule. For starters, forgiven loan debt for some types of student loan forgiveness programs doesn’t count as income for IRS purposes.  If the government discharged (wiped out your loan) for certain reasons, that also does not count as income. And you might be able to avoid a tax bill if you were “insolvent” at the time of forgiveness. (Learn more about the exceptions to paying income tax on forgiven student loan debt.)

If the federal government has forgiven, or will soon be forgiving, some of your student loan debt, talk with a tax expert to determine your tax liability, any exceptions you may qualify for, and how to prepare for the tax hit, if it comes to that.

New Report Documents Abuses by Businesses “Helping” Those With Student Loan Debt

StudentLoans_iStockThe National Consumer Law Center (NCLC) recently issued a report on the practices of a new industry: student loan debt relief services. According to the report, these businesses, which purport to assist those struggling with student loan debt, often engage in deceptive advertising and claims, charge high fees, and give consumers bad information.

What Are Student Loan Debt Relief Services?

With national student loan debt now larger than credit card debt, it’s no surprise that businesses are popping up nationwide with the promise of assisting those Americans struggling under a mound of student loan debt. These services say they will help students get relief under government repayment programs.

The NCLC Study 

The Student Loan Borrower Assistance Program, a project of the NCLC, conducted a study of these ever-increasing businesses. NCLC conducted a “secret shopper” investigation in which an NCLC employee called ten student loan debt relief agencies with a set “story” of her student loan problem.  The report’s authors also reviewed the websites of these ten companies, and ten additional companies.

The results were not that surprising, given the track record of other types of debt relief services over the past few decades. The report documented problems with student loan debt relief these services that are similar to problems with credit repair agencies, debt settlement companies, and others. For some of these other industries, laws have been passed to regulate the services and consumer advocates have warned consumers to beware.

Problems With Student Loan Debt Relief Services 

According to the NCLC report, individuals and businesses that advertise  their ability to assist consumers with student loans often do the following:

  • Fail to inform borrowers about all of their options. The report found that some services recommended loan consolidation to all consumers. Loan consolidation is just one of the remedies available to consumers struggling with student loan debt. It’s not available for all types of student loans, and it’s not always the best option for consumers.
  • Charge high fees. The report found that most student loan debt relief services charge high fees for their services. The programs available to consumers are provided by the federal government. Information and applications are readily available on the Department of Education’s website at www.studentaid.gov. (To learn more about these programs, visit Nolo’s Student Loan Debt topic area.)
  • Use a one-size-fits-all approach. Many businesses claim to provide counseling and assistance tailored to the individual student loan borrower. Yet, the study found that often the recommendation was the same for everyone, regardless of their situation.
  • Make false claims about government affiliation. The study found that many student loan debt relief services claimed they were affiliated with a government agency, or portrayed the government repayment programs as their own.
  • Provide incorrect information. Some of the counselors provided incorrect information to consumers about bankruptcy and repayment options.
  • Use sales representatives, not counselors. In addition, the report found that many of these companies claim to provide expert “counselors” with years of experience, when the companies’ websites advertise positions in “sales” not “counseling.” This calls into question whether claims of expertise are accurate.

Your Best Defense: Arm Yourself With Information

The NCLC report makes various recommendations to alleviate the problem of this new industry, including capping fees, requiring disclosures, and regulating these businesses. However, as a consumer, your best defense against getting taken by these debt relief services is to arm yourself with information.

You can get excellent information about the various repayment and cancellation programs available to you on the Department of Education’s website at www.studentaid.ed and on the NCLC website devoted to student loans at www.studentloanborrowerassistance.org. After learning about your options, you may decide you’d like assistance in completing and submitting and application. If so, consider talking to an attorney, a consumer credit counselor (see Choosing a Credit Counseling Agency).  If you are considering a student loan debt relief company, be sure to go in with your eyes open.  (To learn about debt relief services to watch out for, see the “What to Avoid” section of Nolo’s Debt Settlement topic page.)

Get the Report

To read the whole report, see Searching for Relief: Desperate Borrowers and the Growing Student Loan “Debt Relief” Industry.