Student Loan Tax Increase Looms Ahead

Student+Wallets

NEIU student wallets, before and after repaying the taxes on their loans
Photo by Jacklyn Nowotnik

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Gary Soriano

 

[post-date].

 
Student Wallets
NEIU student wallets, before and after repaying the taxes on their loans
Photo by Jacklyn Nowotnik

Students seeking to pay back their loans after graduating will have higher taxes attached to their repayment plans. A new change to repayment plans seeks to reduce the high number of defaults on student loans but also comes with a tax increase. Although this affects monthly payments, the apparent lump sum due when forgiveness is granted (after about 10- 25 years) also rightfully increases. Taxes on the remaining funds owed must be paid in full.

Income-Based Repayment Plan (IBR) helps students manage their finances by placing a cap or limit on student monthly payments. The plan also forgives any remaining debt after about 10 but typically 25 years. This plan sounds feasible but according to a New York Times article, after forgiveness, the remaining taxes will be required to be paid in full. A graduate student with a six-figure debt will pay taxes in the five figures.

Teachers or those who work for the government can apply for public service loan forgiveness (PSLF). This service decreases the amount of time before forgiveness can occur. According to ibrinfo.org, “after 10 years of eligible payments and employment,” teachers and government workers would be eligible for the PSLF. Taxes for the eligible participants are also forgiven.

“It was necessary for the President to use his Executive Order privileges to get these measures implemented in light of the economy and college graduates not being able to be placed in fields of their interest at the rates that they should,” said NEIU Financial Aid Office Director, Maureen Amos.

Besides the nation’s economic state, this tax increase may largely contribute to the increase in payment defaults. The slowly increasing default rates at Northeastern Illinois University (NEIU) reflect a trend in the nation. Although default rates in 2008 and 2009 seem steady, 7.4 and 7.2 respectively, the number increased by 1.1 in 2010, a 3.2 rate increase since 2006. Considering these numbers and the current state of the national economy, the number of defaults, which occurs 270 days after no payments are made, will likely increase at the university. In an effort to quell this possibility, the Obama Administration reduced repayment periods and adjusted the formula for the IBR, which currently calls for 15% of an individual’s monthly income to be taken out as loan repayment. Effective July 1, 2014, the IBR “is scheduled to reduce that limit from 15% to 10% of discretionary income,” according to a letter from the Office of the Press Secretary at the White House. The White House administration has decided to lower the percentage to encourage and assist those at financial risk of defaulting.

Amos believes that not only will defaults affect individual graduates but the national debt as well. “Students unable to make loan payment schedules causes them to default, thus causing institutions to have higher default rates which could place the institution in jeopardy of losing its ability to participate in Title IV Programs,” said Amos. Title IV deals with the eligibility of U.S. colleges and universities to receive financial aid. One of the main components Title IV looks at is the default rate. If NEIU graduates increasingly default on their loans then it is possible for NEIU to lose their Title IV privileges.

According to US News and World Report, in 2010 NEIU ranked first in the Midwest “for students with the least amount of debt upon graduation.” The changes in Pell Grant qualifications during the 2012-2013 year affected many students who may have turned to loans to accommodate financial need.

More than half of the 10 million people who took out Stafford loans during the 2011-12 school year should be eligible for the reduced payment plan because of their income according to Barclays analyst, Cooper Howes. Assuming this is a trend, this current academic year may see these numbers heighten.

Because evidence of the effectiveness of this tax increase will take some time to obtain results, the task of finding trends that offer clues to the effects of the tax increase may also take some time. It is certain that taxes must be paid after forgiveness is granted. According to nolo.com, the most popular method of collecting on default loans is through the interception of tax refunds.

The most apparent issue at hand for those close to finishing payments is taking care of the remaining taxes. The burden of student loans is not complete until taxes are paid in full.

To learn more about the income-based repayment, visit http://studentaid.ed.gov/ibr. For more available information on financial aid, visit studentloans.gov. To apply for any of these or other repayment plans, a new available tool on the site is intended to speed up the eligibility process so repayment can begin as soon as possible. Most of the loan servicers are already in the system with hopes of getting all servicers in by the end of spring.