Student Debt

Will Your State Tax Your Canceled Student Debt?

Posted on by Cara Smith

Several states are poised to collect income taxes on student loan forgiveness — a move that could leave some borrowers owing as much as $1,000 during tax season.

Individuals in Indiana, Mississippi and North Carolina will almost certainly pay state income taxes on their forgiven federal student loans, according to representatives of those states’ revenue departments and analysis from the Tax Foundation, a tax policy think tank based in Washington, D.C.

Meanwhile, a handful of other states are tentatively planning to tax forgiven student loan debt unless their legislatures take measures to prevent it.

President Joe Biden’s executive order on Aug. 24 could erase all remaining federal student loan debt for as many as 20 million borrowers, according to the White House, and reduce the debts of millions more. In general, borrowers are eligible for up to $20,000 in debt cancellation if they earn less than $125,000 and file taxes as an individual or are married, file jointly and earn less than $250,000.

While the federal government explicitly stated in the March 2021 American Rescue Plan Act that it won’t collect taxes on student debt forgiven through Dec. 31, 2025, not all states are held to the same pledge. Here’s what we know about the rest.

Arkansas

Forgiven student debts are expected to be taxed as income in Arkansas. However, that’ll change if the state’s legislature takes action, said Scott Hardin, an Arkansas Department of Finance and Administration spokesperson, in an email. Hardin noted that the state’s legislature took action to exempt PPP loans from taxation and froze taxation on unemployment payments for two years.

Arkansas has a graduated income tax rate that ranges from 2% to 4.9% depending on annual income, according to the state’s Economic Development Commission. Individuals making less than $5,000 are exempt from state income tax.

California

Forgiven student debts will be taxed as income in California, said Andrew LePage, a spokesperson for California’s Franchise Tax Board, in an email. That’s because student loan forgiveness isn’t occurring under Section 1098-E of the federal Education Code, LePage said, and therefore, it doesn’t meet an exclusion requirement in the state’s tax code. Section 1098-E, titled “Income-Based Repayment,” is in Chapter 28 of the federal Education Code, which pertains to higher education and student financial aid, according to the U.S. Government Publishing Office.

If the federal government states that the program is occurring under Section 1098-E, borrowers wouldn’t have to pay taxes on that debt in California, LePage said.

Indiana

Indiana residents will be taxed on forgiven student loan debts, said Natalie Rodriguez, assistant director of communications at Indiana’s Department of Revenue, in an email.

The state’s income tax rate is 3.23%, so individuals could pay up to $323 in taxes for $10,000 in student loan forgiveness or $646 for up to $20,000 in student loan forgiveness, Rodriguez said. Indiana residents will also have to pay additional county taxes on the forgiven debts, Rodriguez said.

Minnesota

In Minnesota, forgiven student debts are expected to be taxed as income, said Ryan Brown, a spokesperson for Minnesota’s Department of Revenue, in an email. However, that’ll only change if the state’s legislature takes a specific action, Brown said.

Minnesota has a graduated income tax rate, depending on your annual income. The tax rate ranges from 5.35% for individuals earning no more than $28,080 to as much as 9.85% for individuals earning more than $171,220, according to the state’s Department of Revenue.

Mississippi

Mississippi is expected to tax forgiven student loan debt as income, according to the Tax Foundation. Mississippi’s Department of Revenue could not be reached for comment by NerdWallet.

Mississippi charges a 5% income tax on all annual income over $10,000, according to the Tax Foundation.

North Carolina

Forgiven student loan debts are expected to be taxed as income in North Carolina, said Thomas Beam, public affairs manager at North Carolina’s Department of Revenue, in an email. But the rate at which individuals will be taxed remains unclear.

The state’s individual income tax is currently 4.99%, but that figure changes to 4.75% in 2023 and gradually decreases until 2026, when the rate will stand at 3.99%, per the state’s Department of Revenue.

Wisconsin

As it stands, forgiven student loan debts will be taxed as income in Wisconsin. Changing that would require specific action from the state legislature, said Patty Mayers, communications director at Wisconsin’s Department of Revenue, in an email. That action hasn’t been taken yet, Mayers said, but it could still take place in January when the state legislature is back in session.

“We have addressed this discrepancy with federal law in our department’s biennial budget request, in an effort to ensure Wisconsin taxpayers don’t face penalties and increased taxes for having their loans forgiven,” Mayers said.

Wisconsin’s income tax rate ranges from 3.54% to 7.65%, depending on annual income and whether you’re married or single, according to the state’s Department of Revenue.

How to prepare if you’re affected

Whether those taxes are owed during the 2022 tax season (in early 2023) or the 2023 tax season will depend on a few factors, including when an individual completes the U.S. Department of Education’s debt cancellation application. The form is expected to become available in October and close in December 2023, per the Department of Education website.

If you live in a state that might tax your forgiven student loans, consider using an online tax calculator to get an idea of how much you’ll need to save. In many cases, your state’s Department of Revenue website or its franchise tax board website will have such a calculator.

You can also consider using a budget app to automatically siphon off what you’ll need to set aside from each paycheck.

Cara Smith writes for NerdWallet.

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College-Bound Grads May Share $40K in Debt With Their Parents

Posted on by Elizabeth Renter

This year’s high school graduates could take on nearly $40,000 in student loan debt in pursuit of a bachelor’s degree, according to a NerdWallet analysis. And with this debt stretching across federal, parent and private loan sources, the final cost of their education will grow far beyond tuition and fees.

Today, it’s nearly impossible to work your way through college. Because of this, taking on debt for higher education in hopes of greater earning power is generally accepted as a worthwhile cost. But the data shows the amount of debt is increasing and spreading across multiple sources.

2022 college-bound grads could amass thousands in debt

A 2022 high school graduate could borrow as much as $39,500 in student loans by the time they complete their bachelor’s degree, according to NerdWallet’s projections. With 1.3 million high school graduates projected to enter a four-year college and 42% of college graduates taking on debt, this is a significant burden for young professionals entering the workforce.

The average cost of attending a four-year public university, including room and board, reached $22,700 this most recent school year, according to The College Board. Growth in these costs has (fortunately) slowed considerably over the past decade — climbing 12% from the fall semesters of 2012 to 2021 after rising 22% from the fall semesters of 2002 to 2011. But the burden of student loan debt is still significant.

During the repayment period, students who take out loans can expect to pay thousands of dollars in interest on top of the amount they borrow. Federal loans to dependent students pursuing an undergraduate degree are capped at $31,000 total. Students who max out this cap are looking at roughly $350 monthly payments and about $7,000 in interest during a standard 10-year repayment period on their federal loans alone.

And barring “free money,” such as scholarships or need-based grants, they’ll have to turn elsewhere to cover any remaining costs. Parents who haven’t been fortunate enough to amass a college fund are increasingly shouldering those costs as debt.

Parents increasingly picking up debt tab

The share of parents taking out federal parent PLUS loans to help cover the costs of their children’s college education has grown significantly. So has how much they’re borrowing. From 1996 to 2016, the most recent year for which this data is available, the share of dependent students relying on these federal parent loans at public four-year institutions grew from about 7% to 12%, according to the National Center for Education Statistics.

The amount they’re borrowing has also increased, more than doubling from $5,000 to $11,200 during that 20-year period.

Even parents in the lowest income brackets — where students are most likely to benefit from need-based aid — are taking on debt at an increasing rate. The share of dependent students in the lowest income quintile relying on parent PLUS loans rose from 3% in 1996 to 11% in 2016.

Parents may reason that they’re better equipped than their children to cover the added cost of borrowing, but some may think they have no choice. The Pell Grant, the largest source of need-based grant aid, has failed to keep up with the rising cost of education, or even with the pace of inflation, according to an earlier NerdWallet analysis.

The costs of these loans can be far more than the principal and interest — more than one-quarter (26%) of Americans with parent PLUS loan debt say the loans have affected their retirement plans, according to a July 2021 NerdWallet survey. And about 1 in 5 (21%) regret taking out the loan(s) in the first place.

Private student loans, also on the rise, lack protections

College students are also increasingly relying on private loans. In 1996, less than 1% of dependent students at public colleges and universities relied on private loans to cover education costs. Twenty years later, in 2016, nearly 9% did.

Private student loans can be tapped when federal student loan limits are reached and when parents can’t qualify for or don’t want to take out parent PLUS loans. But they’re missing some of the protections and benefits of federal loans.

For example, private loans generally come at a higher interest rate, lack income-based repayment options and are less forgiving when borrowers have trouble making monthly payments. In addition, private student loans weren’t included in the federal interest-free forbearance period recently extended through Aug. 31, 2022.

How families can manage costs of student loan debt

Students hoping to earn a college degree may develop a graduate-at-all-costs attitude, but being strategic and cautious about these costs could make their entry into the professional working world easier.

Maximize grant and scholarship eligibility

All students should fill out the Free Application for Federal Student Aid each year, and early. Not only does the FAFSA qualify you for federal grants and loans, but many states and institutions also use this data to determine additional potential aid. Also, keep an eye on scholarship opportunities beyond freshman year — make it an annual or biannual practice to search for scholarships and apply.

Explore work-study opportunities

Work study is a government-funded program that helps students with financial need find work, often on campus, to help pay for education expenses. Your FAFSA application will ask if you’re interested in the program, then gauge your eligibility.

Tap federal student loans

Before turning to private and even parent PLUS loans, use federal student loans. Above all, these have protections that aren’t provided by the other loan types.

Borrow only what’s needed

It can be tempting to accept all of the loans you’re allotted, but you would only be digging yourself into a deeper hole than necessary. When you receive your financial aid package from the school, only accept enough to cover your expenses.

Stick it out when the going gets tough

Repayment of student loans, no matter the type, is made easier with a higher income. And graduating with a degree makes that income more attainable. The most recent graduation rate among first-time undergraduates is 63%, according to the Department of Education, suggesting many students leave college with debt but without a degree.

If your goal is to graduate, talk to your advisor or student services department when you’re facing challenges or are at risk of dropping out. While getting a degree might not be the right decision for everyone, walking away should be done only after careful consideration of all of the implications.

Elizabeth Renter writes for NerdWallet. Email: elizabeth@nerdwallet.com. Twitter: @elizabethrenter.

The article College-Bound Grads May Share $40K in Debt With Their Parents originally appeared on NerdWallet.

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Are You At Risk of Student Loan Default?

Posted on by Anna Helhoski

Student loan default starts the same way for everyone: a missed payment. Then, another. And another. Until nine total months — about 270 days — pass and your loan defaults.

Three months later, it gets much worse.

A debt collection agency now holds your debt, and you owe them the total balance of your loan along with late fees and collections costs. They can garnish your wages and withhold your tax refund. Your credit gets damaged, and you’re no longer eligible for financial aid. Meanwhile, interest grows on your loan balance.

A total of 26.6 million people are expected to resume student loan payments on May 2 after being paused since March 13, 2020, and government agencies, advocates and lawmakers worry that borrower default numbers could swell.

Concerned parties worry most about newer grads, students who didn’t finish their studies, and those who had missed payments before the payment suspension.

It will take several months to see if those borrowers — about half of student loan recipients — will default, says Michele Streeter, director of policy and advocacy for The Institute for College Access and Success, or TICAS, a not-for-profit higher education research organization.

“It may be a slow-rolling disaster,” she says.

Who is at risk for delinquency and default?

Most borrowers, however, are likely to avoid default, says Adam Looney, a nonresident senior fellow of economic studies at Brookings Institution.

“Most people who owe student loans are graduates, they may have advanced degrees and they have weathered the economic downturn better than every other American,” says Looney. “After two years of a payment pause, many borrowers are in very good economic shape and should be well prepared to begin making payments.”

But default can happen if your finances are shaky to begin with. About 90% of those who default entered college from a low-income background, according to federal data analyzed by TICAS.

It’s not that people who can afford to pay are choosing not to, says Streeter.

“These are people who are trying to find their way out of poverty through enrolling in college and they weren’t able to complete the program or it didn’t pay off in some way,” she says. “They have done all they can to break that cycle and something goes awry and they’re deeper and deeper into a hole.”

In a Jan. 27 report by the Government Accountability Office, the Education Department says about half of all borrowers are estimated to be at increased risk for payment delinquency, which is the first step that leads to default. Borrowers most at risk include those who:

  • Didn’t finish their program of study.
  • Were delinquent before the payment pause.
  • Started repaying their loans within the last three years.

Your ability to repay is what affects your likelihood of delinquency — not how much you owe. Those with graduate and parent PLUS loans, which are not capped, tend to have the highest balances. But Looney says the majority of those with high balances are less likely to default. Numerous federal data analyses show borrowers who defaulted typically have low balances and did not complete school.

There may be outliers such as those with graduate programs that lead to lower-paying jobs and parents reaching retirement age.

You can’t suddenly repay your debt if you don’t have the money to do so. But you can work with existing options to ease the burden — even if you’re unemployed.

How to avoid delinquency and default

If you can afford your monthly payment on a standard payment plan, stick with it. But if you can’t make your payments and are at risk of default, connect with your servicer to:

  • Seek a more affordable payment. Consider an income-driven repayment plan, which ties your monthly payment amount to a portion of your income and extends repayment to 20 years for undergraduate loans or 25 years if you have any graduate debt or parent PLUS loans. It’s possible that at the end of this repayment period, you could see the remainder of your debt forgiven, but it’s uncommon.
  • Enroll in automatic payments. If you were signed up for autopay before the payment pause, you must contact your servicer to confirm you want to restart automatic payments; it won’t happen without your consent.
  • Consider an additional pause. If you’re unemployed or need a short-term payment pause, consider an unemployment deferment or hardship forbearance. However, interest will continue to collect and increase your loan principal.

If you’re not getting the help you need from your servicer, contact the federal student loan ombudsman to escalate your issue. And report any mishandling of your loans to the Consumer Financial Protection Bureau, the Federal Student Aid feedback center, your state ombudsman or attorney general’s office.

What borrowers in default can do

The borrowers in the most precarious position are those whose loans were in default before the pandemic. The Education Department is conducting outreach to those borrowers but doesn’t have valid email addresses for at least 25% of them, according to the GAO report.

There’s an extra bit of leeway for borrowers in default: The Education Department has suspended collections activities through Nov. 1, 2022.

That means borrowers in default have more time to get their payments back in good standing. There are two main ways to do it.

The more challenging option is to repay the entire loan balance.

The other choice is to undergo student loan rehabilitation, but you can do that only once. First, borrowers must agree to a reasonable repayment amount — usually 15% of their discretionary income. Then, they must make nine voluntary payments on time during a 10-month period and, finally, enroll in an income-driven repayment plan once rehabilitation ends.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article Are You At Risk of Student Loan Default? originally appeared on NerdWallet.

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Balancing Hopes, Dreams and a Low-Paying College Major

Posted on by Anna Helhoski

Humanities majors are more than a punchline. Not everyone can or wants to be a STEM major, and the world would be a poorer place if they were.

To have great things to read, music that inspires, perspectives that challenge us — to have a sense of reward and meaning in life —  we must have students who pursue college degrees that don’t lead directly to a big paycheck.

That turns the pursuit of intellectual curiosity and artistic appreciation into a balancing act: the likelihood you’ll make a good living versus the debt you incur along the way.

“I encourage students to find this balance between what they like and what pays,” says Nicole Smith, research professor and chief economist at the Georgetown University Center for Education and the Workforce. “I’m not discounting how beneficial these positions are to our society as a whole, but if you can’t pay back your student loan, you’ll be in a serious state,” Smith says.

Liberal arts grads face longer odds compared with science, technology, engineering and mathematics degrees, but a well-chosen humanities major doesn’t have to be a vow of poverty.

How long does it take to recoup what you paid?

To assess the value of earning a specific degree at a specific institution, consider the concept of price-to-earnings premium, spearheaded by Michael Itzkowitz, senior fellow of higher education at Third Way, a center-left think tank.

It measures what you pay out of pocket, including loans, against the amount you’ll earn each year above the earnings of a typical high school graduate. The results show how quickly you can get a return on investment in your college major.

The majority of liberal arts degrees lead to a “pretty good ROI,” says Itzkowitz, but the specific program you graduate with and the type of degree you earn will affect individual outcomes.

The bachelor’s degree programs that allow graduates to recoup their costs within five years or less include what you’d expect: Registered nursing, electrical engineering and dental assistants all make the list.

Among the programs with no economic ROI at all: drama, fine arts and anthropology.

Itzkowitz says the majority of college programs enable students to recoup costs within 10 years or less. “College is still worth it the vast majority of the time,” he says.

Unfortunately, his research also found nearly one-quarter of all college programs of study show graduates failing to recoup their costs in the 20 years after graduation.

There are several tools that can help you compare data on costs, earnings and debt:

  • The College Scorecard, a data tool from the U.S. Department of Education.
  • An interactive map of price-to-earnings premiums from Third Way.
  • The Buyer Beware tool from the Georgetown Center for Education and the Workforce.

Of course, education and major aren’t the only predictors of income. Your wages will also be affected by where you live, your gender and race, whether you work in the public or private sector, and your experience level.

Should you get a graduate degree?

Your humanities degree could go much further if you get an advanced degree — generally, the more education you have, the greater your earnings, according to Bureau of Labor Statistics data.

But you should continue to weigh cost versus benefit since it’s also easier to rack up debt. A graduate degree may increase your earning potential, or it may just increase your debt.

For example, if you majored in liberal arts for your bachelor’s degree you can expect a median annual wage of $50,000, according to the Bureau of Labor Statistics.

But if you get a graduate degree in law, taking on more debt, you could earn a median of $126,930. A master’s of fine arts, on the other hand, is unlikely to yield higher earnings: The annual median wage is $42,000.

Your other options could include a minor in a field with higher earnings, an internship to get on-the-job experience or finding less-expensive graduate programs if your intended field requires it.

If you’re taking on additional student debt, remember that the federal government offers payment plans that tie the size of your payment to your income. Most private loans don’t.

What are your options if your earnings are low?

If you’re already working in a low-paying field and you have student loan debt, look at how you can lower payments or discharge your debt.

If you’re having trouble making payments, consider enrolling in an income-driven repayment plan, which ties payments to your monthly income. Your payment amounts will increase as your earnings do, too.

Those working in public sector fields should learn the ins and outs of public service loan forgiveness, a red-tape-laden process of getting your loans discharged after 10 years of payments on a qualifying payment plan while working full time in a qualifying field.

This article was written by NerdWallet and was originally published by The Associated Press. 

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article Balancing Hopes, Dreams and a Low-Paying College Major originally appeared on NerdWallet.

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How Much You’ll Really Pay for That Student Loan

Posted on by Ryan Lane

Those who graduate college with student loans owe close to $30,000 on average, according to the most recent data from the Institute for College Access & Success.

But they’ll likely repay thousands more than that because of interest. One key to limiting interest cost is choosing the right repayment plan. The bottom line? Opting for lower payments will cost you more overall.

Using a tool like the Education Department’s Repayment Estimator can help you better understand potential costs. Here’s how much $30,000 in unsubsidized federal student loans would cost under different plans at the 2019-2020 undergraduate rate of 4.53%.

Standard repayment

  • Total repaid: $37,311
  • Monthly payment: $311
  • Repayment term: 120 months

The standard plan splits loans into 120 equal payments over 10 years. Federal borrowers automatically start repayment under this plan, unless they choose a different option.

Standard repayment adds more than $7,000 to the loan’s balance in this example, but that’s less than most other options.

Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling, says to stick with the standard plan if payments aren’t more than 10% to 15% of your monthly income.

“The monthly payment would be higher, but in the long run [you] would save more in interest charges,” Coleman says.

Graduated repayment

  • Total repaid: $39,161
  • Monthly payment: $175 to $525
  • Repayment term: 120 months

Graduated plans start with low payments that increase every two years to complete repayment in 10 years. Despite having the same repayment term as the standard plan, graduated repayment costs $1,850 more overall due to additional interest costs.

Cathy Mueller, executive director of Mapping Your Future, a nonprofit located in Sugar Land, Texas, that helps college students manage debt, says graduated repayment may be a good option for those who expect their earnings to increase in the future.

However, those doing well careerwise should try to make the standard plan work because of its lower interest costs.

“It’s not going to be a huge difference, but every penny counts,” she says.

Extended repayment

  • Total repaid: $50,027
  • Monthly payment: $167
  • Repayment term: 300 months

The extended plan stretches repayment to 25 years, with payments either fixed or graduated. Fixed payments add more than $20,000 to the example $30,000 balance; graduated payments would inflate your balance even more.

“[Extended repayment] is not going to be best for a lot of people,” Mueller says. “But it is an option.”

You must owe more than $30,000 in federal student loans to use extended repayment.

Income-driven repayment

  • Total repaid: $37,356
  • Monthly payment: $261 to $454
  • Repayment term: 110 months

The government offers four income-driven repayment plans that base payments on your income and family size.

This example uses the Revised Pay As You Earn plan, a family size of zero and an income of $50,004, based on starting salary estimates from the National Association of Colleges and Employers. It also assumes annual income growth of 5%.

Income-driven repayment costs about the same as standard repayment under these circumstances. But these plans are typically a safeguard for borrowers who can’t afford their loans, as payments can be as small as $0 and balances are forgiven after 20 or 25 years of payments.

Lindsay Ahlman, senior policy analyst for the Institute of College Access & Success, says to think long-term before choosing an income-driven plan, and know you can always switch to income-driven repayment if you hit a rough patch.

“A lot of things are going to happen over the course of repayment — your earnings trajectory, your life decisions like marriage and children — that affect your income-driven payment,” Ahlman says. And while an income-driven plan can reduce monthly payments, you may pay more overall because the repayment period is longer than the standard plan, she says.

Ways to save

Even the least expensive repayment plan could add $7,000 to your loans. If you just graduated and want to shave down that amount, you have options.

Coleman suggests making payments during the six-month grace period and paying off interest before it’s added to your balance when loans enter repayment, if possible.

Other ways to cut costs include letting your servicer automatically deduct payments from your bank account, which can reduce your interest rate, and paying loans twice a month instead of once. You can always prepay student loans without penalty.

This article was written by NerdWallet and was originally published by The Associated Press.

Ryan Lane is a writer at NerdWallet. Email: rlane@nerdwallet.com.

The article How Much You’ll Really Pay for That Student Loan originally appeared on NerdWallet.

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6 Things to Know About Student Loans Before You Start School

Posted on by Anna Helhoski

The summer before your freshman year in college means choosing classes, checking out your future roommate’s Instagram and figuring out how you’re going to pay the bills.

Chances are you will need a loan: 2 out of 3 students have debt when they leave school, according to 2017 graduate data from the Institute for College Access and Success. But consider a loan after you’ve accepted grants, scholarships and work-study. You can get these by submitting the Free Application for Federal Student Aid, or FAFSA.

Here are six things you need to know about getting your first student loan.

1. Opt for federal loans before private ones

There are two main loan types: federal and private. Get federal loans first by completing the FAFSA. They’re preferable because you don’t need credit history to qualify, and federal loans have income-driven repayment plans and forgiveness that private loans don’t.

You may be offered two types of federal loans: unsubsidized and subsidized. Subsidized loans — for students with financial need — don’t build interest while you’re in school. Unsubsidized loans do.

Take a private loan only after maxing out federal aid.

2. Borrow only what you need — and can reasonably repay

Undergraduate students can borrow up to $12,500 annually and $57,500 total in federal student loans. Private loan borrowers are limited to the cost of attendance — tuition, fees, room, board, books, transportation and personal expenses — minus financial aid that you don’t have to pay back.

Aim to borrow an amount that will keep your payments at around 10% of your projected after-tax monthly income. If you expect to earn an annual salary of $50,000, your student loan payments shouldn’t be over $279 a month, which means you can borrow about $26,000 at current rates.

To find future earnings, look up average salaries in the U.S. Department of Labor’s Occupation Outlook Handbook. Then, use a student loan affordability calculator to estimate payments.

Your school should provide instruction on accepting and rejecting financial aid in your award letter. If you’re not sure how to do it, contact your financial aid office.

“We’re not scary people,” says Jill Rayner, director of financial aid at the University of North Georgia in Dahlonega, Georgia. “We really do want students and families to come in and talk with us so we can help strategize with them.”

3. You’ll pay fees and interest on the loan

You’re going to owe more than the amount you borrowed due to loan fees and interest.

Federal loans all require that you pay a loan fee, or a percentage of the total loan amount. The current loan fee for direct student loans for undergraduates is 1.062%.

You’ll also pay interest that accrues daily on your loan and will be added to the total amount you owe when repayment begins. Federal undergraduate loans currently have a 5.05% fixed rate, but it changes each year. Private lenders will use your or your co-signer’s credit history to determine your rate.

4. After you agree to the loan, your school will handle the rest

Your loan will be paid out to the school after you sign a master promissory note agreeing to repay.

“All the money is going to be sent through and processed through the financial aid office — whether it’s a federal loan or a private loan — and applied to the student’s account,” says Joseph Cooper, director of the Student Financial Services Center at Michigan Technical University in Houghton, Michigan. Then, students are refunded leftover money to use for other expenses.

5. You can use loan money only for certain things

Loan money can be used for education-related expenses only.

“You cannot use it to buy a car,” says Robert Muhammad, director of the office of scholarships and financial aid at Winston-Salem State University in North Carolina. “It’s specifically for educational purposes: books, clothing, anything that is specifically tied to the pursuit of their education.”

You can’t use your loan for entertainment, takeout or vacations, but you should use it for transportation, groceries, study abroad costs, personal supplies or off-campus housing.

6. Find out who your servicer is and when payments begin

If you take federal loans, your debt will be turned over to a student loan servicer contracted by the federal government to manage loan payments. If you have private loans, your lender may be your servicer or it may similarly transfer you to another company.

Find your servicer while you’re still in school and ask any questions before your first bill arrives, says John Falleroni, senior associate director of financial aid at Duquesne University in Pittsburgh. They’re also whom you’ll talk to if you have trouble making payments in the future.

When you leave school, you have a six-month grace period before the first bill arrives.

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The article 6 Things to Know About Student Loans Before You Start School originally appeared on NerdWallet.

Will Inflation Be Good for Student Loan Borrowers?

Posted on by Anna Helhoski

Student loan borrowers are taking to social media to celebrate inflation.

That’s right, inflation: the sound-the-alarm scourge to consumers everywhere that’s hiking the price of goods and services. Over the last year, prices have risen 6.2% — the largest annual increase in three decades, according to October data from the Bureau of Labor Statistics.

Student loan borrowers face a payment restart in February after a 22-month pause. In the meantime, they’re praising inflation because — as they posit — it reduces the value of their debt.

“It’s always good to be a fixed debt holder during an inflationary period,” says Jason Delisle, senior policy fellow in the Center on Education Data and Policy at the Urban Institute, a nonprofit research organization.

This is the logic: Since student loans have a fixed interest rate, meaning the rate is not sensitive to market fluctuations like variable rate loans are, its value decreases as rising inflation devalues the dollar. The result is that loans borrowed in the past are worth less when you repay them in the present.

Kathryn Anne Edwards, an economist at the RAND Corporation, a nonprofit global public policy think tank, says, “In theory you can inflate away debt; it’s something we don’t recommend.”  She says borrowers might want to curb their expectations about inflation’s potentially positive effect. Your debt’s value may technically be lower, but that won’t matter if your wages don’t keep up with inflation, and if your other household expenses also rise faster than your wages.

Inflation’s impact on debt only benefits you if your wages increase

The value of your fixed rate debt only declines if your wages also rise at a comparable rate alongside inflation.

As inflation continues to climb, it’s unclear whether wages will rise across the board. It’s possible that labor shortages and widespread employee demands for higher pay will force employers to increase wages, but it entirely depends on the industry or sector, experts say.

And if the rate of inflation rises past the rate of wages, your ability to pay for goods and services — consumer purchasing power — declines, as does your ability to repay debt.

However, you could be more insulated from certain rising costs than certain groups. For example, increases in healthcare costs hit the elderly harder than others, and childcare costs hit those with young children as opposed to those with older children.

It’s unclear if wages will or won’t keep up with inflation. But long-term effects from that might not happen quickly, says Constantine Yannelis, an assistant professor of finance at University of Chicago Booth School of Business.

What we have seen so far is this: Real average hourly earnings for all employees decreased 1.24% from October 2020 to October 2021, according to November 10, 2021, data from the Bureau of Labor Statistics.

Wage increases could also increase your loan payments

Say your wage does increase along with inflation and your loan payment stays the same. You could benefit from inflation in that your loan will be less expensive since its amount does not change, but your income has.

However, if you’re enrolled in an income-driven repayment plan, you must recertify your income in order to stay on that plan. Income-driven repayment is beneficial for borrowers whose loan payments are more than they can handle. These plans set payments at a portion of your discretionary income and extend repayment.

That means if your income rises in response to inflation or other reasons, and you’re enrolled in an income-driven plan, then your monthly payment amount will also increase. There is an upside though: The higher your loan payment, the faster you pay off your debt and the more you’ll save on interest.

“It’s not necessarily a bad thing, but the perception of borrowers matters a lot here and there may be a little bit of a backlash when people see their payments rise because their incomes have gone up,” Delisle says.

Yannelis says inflation could affect your payment under an income-driven plan in a different way. If the federal poverty guidelines shift in response to inflation, then the amounts used to calculate discretionary income could change, as well.

All borrowers need to factor student loans back into their budgets

Nearly 43 million people will have had 22 months without federal student debt payments in their budget come February 2022. A lot can change in that time.

The payment pause was intended to give borrowers breathing room to focus on other financial needs. For some borrowers, this meant paying for rent and food. For others, it meant paying down their student loan principal, buying a home or a car, finding higher quality care for their children or elders, investing or padding a retirement account.

And according to data from the Federal Reserve Bank of St. Louis, many Americans were able to save since the start of the pandemic due — in part — to a combination of the payment pause, the expanded Child Tax Credit, extended unemployment insurance and stimulus checks.

Borrowers with financial cushioning won’t feel the sting of repayment or inflation’s impact on goods and service costs as quickly as others, experts say. But those who are still out of work or who were in default prior to the pandemic may have a tougher time with the transition.

What all borrowers can do ahead of payment restarting is contact their servicers about their options, which could include:

  • Enrolling in an income-driven repayment plan, which would lower your monthly payment to $0 if you’re unemployed.
  • Submitting an unemployment deferment request if you’re out of work but don’t expect to be for long, and if you don’t want to commit to an income-driven plan.
  • Requesting a hardship forbearance for a short-term hardship unrelated to unemployment.

If you choose to take an additional pause through deferment or forbearance, interest will continue to collect and will be added to your principal whenever you do start repayment.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article Will Inflation Be Good for Student Loan Borrowers? originally appeared on NerdWallet.

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Student Loan Forgiveness: What’s Getting Fixed?

Posted on by Anna Helhoski

A limited waiver announced by the U.S. Department of Education is expected to immediately wipe the slate clean for 22,000 student borrowers seeking Public Service Loan Forgiveness and speed the process for at least 500,000 more.

It’s not the broad student loan forgiveness borrowers may be dreaming of. Instead, it’s the latest example of the Biden administration’s strategy of tackling student loan debt through existing programs.

“The Biden administration has committed to an overhaul of the student loans system and how it functions — whether the programs are easy access and whether people can get forgiveness — and I think this is an important step forward on that path,” says Sarah Sattelmeyer, project director of education, opportunity and mobility in the higher education initiative at New America, a public policy think tank.

Neither President Joe Biden nor Congress has committed to forgiving loans en masse despite calls to do so from prominent Democrats, state officials and consumer rights advocacy groups.

But since the start of Biden’s term, the Department of Education estimates that more than $11.5 billion in loans have been canceled for over 580,000 borrowers through updates to existing forgiveness programs.

The department is clearing backlogs of applications from borrowers who were defrauded by their schools, faced school closures before attaining a degree and have permanent disabilities — now, that list also includes those seeking forgiveness in exchange for public service.

Here are the improvements that have been made so far.

Where Public Service Loan Forgiveness stands

The Department of Education issued new guidance in October to ease the burdensome application process for Public Service Loan Forgiveness, or PSLF. It’s a program to discharge debt for borrowers who work for public service employers, like the government or public schools and hospitals.

Forgiveness through PSLF has been notoriously difficult to attain because of complex rules about the type of loans and repayment plans allowed. Plenty of technicalities have disqualified payments from counting toward the 120 needed for discharge. And then there’s the paperwork: 10 years’ worth of employment certification.

As a result of the red tape, only about 1% of the nearly 400,000 borrowers who have applied have ever had loans forgiven through PSLF, according to federal student aid data.

When the PSLF program was created, total student debt was around $550 billion, says Seth Frotman, executive director of the Student Borrower Protection Center. “We were worried about the impact student debt was having on the viability of those entering and staying in public service fields,” Frotman says. “It’s even more important that this program works in light of where we find ourselves today — facing a $1.7 trillion student debt crisis.”

The department has pursued quick fixes before, like combining employment eligibility forms with the application and temporarily expanding eligibility for select borrowers. But the Department of Education acknowledged in a June 2021 memo that those efforts haven’t been enough to curb “confusion and frustration.”

“There are a lot of people who were paying on their federal loans, working in a qualifying job, believing they were working toward forgiveness only to find out, when they eventually submitted an application, that they had the wrong type of loan, like a FFEL loan, or they were not in the right type of repayment plan,” says Bradley Custer, senior policy analyst for higher education at the Center for American Progress, a public policy think tank.

What’s new for borrowers seeking PSLF

Under the new PSLF limited waiver, borrowers who worked full time for a qualifying public service employer can get prior loan payments counted toward PSLF, even if payments were:

  • Made on disqualified Family Federal Education Loan program loans (that is, commercially held) or Perkins loans, so long as they consolidate into a direct loan.
  • Previously consolidated, which reset payments that counted toward PSLF to zero.
  • Made in the wrong repayment plan, like a standard, graduated or extended plan.
  • Made late.
  • On pause while the borrower was on active duty in the military.

Parent PLUS borrowers were left out of this limited waiver; those borrowers can still apply, but old application rules remain. Student loan experts are unsure why parent PLUS borrowers were excluded.

Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, says the waiver solves “operational issues we’ve seen up to now that have plagued the PSLF program,” but still encourages borrowers to be aware of all the details of PSLF rules for the best chance of getting their loans discharged.

Borrowers who are eligible for relief under the new limited waiver must submit a PSLF form by Oct. 31, 2022, to qualify. Beginning immediately, borrowers can consolidate their student loans via the federal student aid site and submit the PSLF form to certify employment and apply for PSLF.

Federal student loan payments are paused through Jan. 31, 2022. During this forbearance, which began March 2020, each month of nonpayment counts toward forgiveness.

Borrowers should also remember this: You never have to pay anyone to apply for PSLF, consolidate your debt or access the benefits of the PSLF waiver. Any company promising to do the work for you is a scam.

What else has changed and what’s next

The Department of Education under Secretary Miguel Cardona has updated other existing discharge programs, including:

  • Borrower Defense to Repayment: Over $1.5 billion in claims among nearly 92,000 borrowers who were deceived or misled by their schools has been approved.
  • Closed School Discharge: $1.1 billion was made automatically available to 115,000 borrowers who attended the shuttered ITT Technical Institute. Borrowers who attended a school that shut down between Nov. 1, 2013, and July 1, 2020, can expect an automatic loan discharge as long as they didn’t enroll in another school within three years of the closure.
  • Total and Permanent Disability Discharge: A total of $7.1 billion among 364,000 borrowers who qualify as disabled has been discharged. To identify future eligible borrowers, data will be shared with the Department of Education from the departments of Social Security and Veterans Affairs. Earnings documentation requests are also suspended.

More changes are expected to be made to PSLF by the end of 2022, according to the Department of Education.

Also in flux: Who is servicing student loans

Following in the footsteps of fellow federal loan servicers Navient and GSMR, FedLoan, the private servicer managing all loans for borrowers on track for PSLF, is ending its contract after Dec. 31, 2021. That means borrowers seeking PSLF will have a new servicer. Before losing access to your FedLoan account, download all payment records to ensure nothing gets lost in the transition.

Loan servicer MOHELA is taking on the FedLoan portfolio, according to the department, but it’s still unclear which servicer will be managing PSLF in the future.

Borrowers should update the contact information in their Federal Student Aid, or FSA, accounts to receive information directly from the government about the PSLF waiver.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article Student Loan Forgiveness: What’s Getting Fixed? originally appeared on NerdWallet.

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What Would It Take to Solve the Student Debt Crisis?

Posted on by Anna Helhoski

The possibility of federal student loan forgiveness grabs all the headlines. But experts say no single policy — not even wiping the slate clean for millions of borrowers — solves the root causes of the nation’s $1.74 trillion student loan debt crisis.

That debt has been fueled by decades of wages not keeping up with the rising cost of college. And unless wages increase and college costs decrease, students will still need to take on debt to complete degrees, and they’ll face greater difficulty repaying loans.

“There are no $1.7 trillion silver bullets,” says Seth Frotman, executive director of the Student Borrower Protection Center, a nonprofit advocacy organization.

So what could work? It’ll take more than a headline-grabbing wipeout of student debt.

Frotman says, in addition to canceling debt, he would prioritize efforts to make college more affordable and to reform the borrowing and repayment systems. Michele Streeter, senior policy analyst at The Institute for College Access and Success, says student loans remain an important college access tool for students, but forgiveness and repayment programs should be easier to access and automated whenever possible.

As a new crop of students gets ready to borrow for college and multiple generations of borrowers grapple with debt, experts weigh in on possible solutions.

Forgive student loan debt

Broad forgiveness — around $10,000, for example — could help the most vulnerable borrowers: those who never graduated and lack the bigger paychecks that typically come with a degree to pay off the debt they acquired along the way.

Experts diverge on whether there should be broad forgiveness. But if it does happen, they agree future debt accumulation must be addressed.

“Until somebody can come up with a proposal for what happens on day two and everyone starts borrowing again, that will be one major hurdle to any level of forgiveness,” says Carlo Salerno, vice president for research at CampusLogic, a developer of college financial aid management tools.

Streamline existing forgiveness programs

There’s too much red tape inherent to existing forgiveness programs, experts say. Salerno calls it a “bureaucracy and paperwork crisis.”

These programs have low rates of acceptance: As of November 2020, 6,493 Public Service Loan Forgiveness applications, or 2.2%, were approved, and so far just 32 borrowers total have received income-driven repayment forgiveness (though most won’t be eligible until 2035).

Democrats in Congress have suggested making all federal student loans and repayment plans eligible for PSLF, waiving restrictions for forgiveness and automatically qualifying borrowers.

Cut or lower interest rates

Federal student loan borrowers haven’t had to make payments since March 13, 2020, and they won’t again until Oct. 1. During this pause, zero interest is accruing. That means loans won’t grow and, if you can afford to make payments, you can pay off your debt faster.

Making zero interest permanent or lowering interest on existing debt could help borrowers pay off their debt without growing the principal, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

Many borrowers Mayotte hears from say their biggest gripe is growing interest.

“They say, ‘I feel like I should pay (my loans) back, but I don’t feel like I’m on a level playing field because of the interest,’” Mayotte says.

Condense income-driven repayment

Income-driven repayment plans, federal options that set student loan payments at a portion of a borrower’s income, are a strong safety net. But experts say the four income-driven options — in addition to the three other federal repayment plans — should be streamlined into one new program. Some suggest automating enrollment.

“There’s no rhyme or reason for the variety of programs that exist in this space other than they were developed over time,” says Beth Akers, resident scholar at the American Enterprise Institute, a conservative public policy think tank, where she focuses on the economics of higher education. “We need to simplify the safety net for students and make it so simple that they can understand it exists and what benefits it can provide for them.”

Wesley Whistle, senior advisor for policy and strategy at New America, a left-of-center public policy think tank, says automatic enrollment into an IDR plan could benefit delinquent or defaulted borrowers, but is concerned about auto-enrolling students right out of college and its effect on their ability to repay the principal. For many, payments may not even cover interest.

“Even working full time at a minimum wage job, you’re not making enough to knock into your principal,” says Whistle, who specializes in higher education policy. That could leave borrowers still paying student loans 20-25 years into the future.

Make college tuition-free

Tuition-free college at the associate’s degree level, as President Joe Biden has proposed, could particularly benefit low-income students who otherwise wouldn’t attend college and could reduce overall borrowing. College affordability advocates are calling for tuition-free four-year programs as well.

However, experts agree tuition-free programs will still require borrowers to take on debt to cover living expenses — on or off campus.

“I don’t think it’s a terrible idea, but I don’t think it’s a game changer,” Akers says, adding she thinks expanding existing Pell Grant programs could have a stronger effect on affordability.

Expand Pell Grants

Pell Grants originally covered around 80% of college costs, but today they cover less than 28%, according to The Institute for College Access and Success.

Lawmakers and experts say Pell Grants, targeted to low-income students, should be doubled from their current maximum of $6,495 to better meet the cost of college for students with financial need.

“The program is super well-targeted,” says Streeter of TICAS. “Even if you were to double the maximum grant, that targeting is still in place, and I think that’s why it is so popular and has a lot of bipartisan support.”

Advocates also argue eligibility should extend up the income ladder to include students in middle-income brackets who still need financial aid.

This article was written by NerdWallet and was originally published by The Associated Press. 

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article What Would It Take to Solve the Student Debt Crisis? originally appeared on NerdWallet.

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College, Interrupted: The Case for Going (Back) to School

Posted on by Anna Helhoski

A cautionary note for the high school classes of 2020 and 2021: Waiting to enroll in college decreases the likelihood you’ll ever attend or complete a degree.

It’s a valid concern for both cohorts. Due to the pandemic, undergraduate enrollment was down 2.5% in fall 2020 and down 4.5% for spring 2021, compared with the previous fall and spring, respectively, according to the National Student Clearinghouse Research Center.

There are also warning signs of an enrollment slump to come. The class of 2021 is lagging in completing the Free Application for Federal Student Aid, or FAFSA. The application is the gatekeeper for college financial aid and, as of April 2, 2021, completion is down 7% compared with applications completed by the same time last year. FAFSA completions are an indicator of enrollment for the upcoming academic year, says Bill DeBaun, director of data and evaluation at the National College Attainment Network.

“When you’re talking about the senior class that measures millions of students, you’re talking about many students with their postsecondary trajectory potentially altered,” DeBaun says.

Skipping out on college, delaying enrollment or not finishing a degree has consequences:

  • You’ll earn less if you don’t go.
  • If you don’t go soon, you’re less likely to go back.
  • If you start a degree but don’t finish, you’re more likely to default on any student loans you took out.

A gap year made sense for many high school graduates in 2020 and is appealing for 2021 grads, too, experts say. The pandemic resulted in an uneven college experience that may have included hybrid and virtual learning, regular COVID-19 testing and quarantines. And not every student was well-positioned — or had the broadband access — to learn virtually.

“We’ll probably be having this conversation 10 and 20 years from now, as to how this affected the next generation,” says Nicole Smith, research professor and chief economist at the Georgetown University Center on Education and the Workforce.

If you sat out from college because of the pandemic or are planning to, experts argue that you should reconsider. Here are three key reasons why.

You’ll earn more with a degree

So what if you delay or never go to college? Opportunity costs, mostly.

Getting a degree could mean earning nearly a million dollars more over your lifetime, according to data from the Georgetown University Center on Education and the Workforce.

Delaying enrollment for one year can cost a year’s worth of wages over your lifetime, which you never recoup, according to a July 2020 report from the Federal Reserve Bank of New York.

Earnings, no matter the education level, will vary by occupation, region, gender and race. But bachelor’s degree holders still earn, on average, 31% more in their lifetimes than associate degree holders and 84% more than those with only a high school diploma.

That’s not to say you can’t consider education alternatives — short-term credential and trade programs, apprenticeships and associate degrees are all viable options. Statistically, though, a four-year degree or higher is a stronger insurance for greater earnings over your lifetime.

For low-income students and students of color who statistically have less generational wealth, degrees are also the best vehicle for upward mobility, says Michelle Dimino, education senior policy advisor at Third Way, a public policy think tank. A recent Third Way study found that most bachelor’s degree programs net low-income students high enough wages to justify out-of-pocket costs.

“What we’re seeing is students who would most benefit from the socioeconomic benefits a college degree can provide are the least likely to be enrolling at this point in time,” Dimino says. “The biggest concern that we have for those students delaying enrollment is it might lead to permanently forgoing college.”

The longer the pause, the harder it is to finish a degree

According to federal data, there are millions of adult learners who don’t start college until they’re well into their 20s or older.

But you’re less likely to complete a degree if you delay: Nearly half of those who delayed enrollment left college without earning a degree, compared with 27% of those who didn’t delay, according to a 2005 report from the National Center for Education Statistics.

The further you get from high school, the less academic support and one-on-one encouragement you have to attend college, experts say. It’s also more likely you’ll get a job, start a family and have other income demands.

“There’s something about that window of 18 to 24; if you start out at that point, you’re likely to get to where you need to be,” Smith says.

You’re more likely to default on student loans if you don’t finish

Returning to college is especially important if you have student debt, as most students do. Without a degree, federal data shows, you’re statistically more likely to be late on payments and default. This outcome can lead to a damaged credit score, collection costs and wage garnishment.

Federal data shows that among a cohort of students who started college in 2003-2004 and defaulted on student debt, nearly half didn’t complete their education, while 10% finished a bachelor’s degree.

The situation is the worst for Black student borrowers: The Brookings Institution found that Black first-time college students default at a rate three times higher than their white counterparts.

How to pay for college if your family’s finances have changed

If you’re reconsidering your decision to delay or forgo college, first figure out the best way to pay.

Start by submitting the FAFSA as soon as possible to qualify for federal, state and school financial aid, including Pell Grants, scholarships, work-study and federal student loans.

If your family’s financial situation has changed due to the pandemic, request a professional judgment from your prospective or current school’s financial aid office. You’ll need to request a specific amount and submit documentation of why you need more aid, like confirmation of a parent’s unemployment or medical bills.

If there’s still a gap to fill, consider private loans.

Alternately, you could think about entering community college for a year or two, then transferring. Find out if the community college you’re considering has credit transfer agreements (known as an articulation agreement) with any four-year colleges you’re interested in attending.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article College, Interrupted: The Case for Going (Back) to School originally appeared on NerdWallet.

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