In my recent post on choosing freedom, I mentioned how student loans can go horribly wrong when life throws you a curve ball along your path from attending college to ultimately paying off your student debt.
A reader made a great comment on that blog post that I will respond to in more detail here. Here’s the comment:
“Great post!! I have had a curve ball thrown at me, and it has left me with what once was 19k in student loans to now a little over $25k. Since I am on an income contingent plan, my minimum payment is $0. At the end of the 25 year repayment period I can finally discharge the loan but it will be counted as income on my taxes.
A family I know had $50k in student loans, that quickly accumulated to $150k in debt due to their son having autism and them not being able to afford his medical needs, house loan, daily living needs, etc. Their financial life is ruined. The government started to take automatic deductions from their paychecks to cover the costs of their defaults, and once you default the amount of remedies is significantly reduced.”
One of the huge downsides of taking on student loans is that your plan to attend school, complete school with your degree, get employment in your field of study, make good money, and pay off your student loans afterwards, have to all generally work out exactly as you planned in order to clear the debt.
And of course, most people don’t generally plan exactly when they are going to fall in love, or when they are going to get married, or when they are going to have children, or any of the major events that life has in store for you.
Not to mention which ailments, family troubles, or other surprises will happen along the way.
Life Throws Curve Balls
It’s just a fact; life often throws you a curve ball. The more flexible you are, the more freedom you have created (and chosen) financially, the easier it is to roll with the punches.
The reader had $19,000 in student loans that grew to $25,000 when life happened along the way.
When their income took a hit, the interest grew and maybe other penalties or maybe even collection fees were added on. The income contingent and income based repayment plans are programs available to those with federal student loans whose debt is large but their income is small (at least relative to their debt).
Income Based Repayment (IBR)
So let’s talk about the income based repayment plan, or the IBR.
Once eligible for the IBR, your payment is set based on your income, regardless of how much you owe.
So in the reader’s case, their income is such that there is no payment required. The good news is the government, or whoever the loan servicer is on behalf of the government, considers the loan to be in good standing because no payment is due based on their income level.
The bad news is that interest on the loan will continue to accrue in most cases and the total amount of the student debt will grow as a result. The IBR program says that whatever balance remains after 25 years in the program will be forgiven.
Current law says that debt forgiveness income is taxable. You basically get a 1099 for the debt forgiven and now you owe the IRS the taxes on that amount. Holy cow! Now you’re out of the pot and into the frying pan.
Who knows what politicians will do to make the IBR program better or worse over the next 20 to 25 years. That’s a long, long… long time.
The Debt Grew and Grew and…
The reader also writes that they know a family whose student loans grew from $50,000 to $150,000. They had a son with autism and that created a whole new component to their life in addition to normal living expenses, a home mortgage, etc.
“Their financial life is ruined.”
The government then exercised its right to garnish their wages and collect huge collection fees and other penalties and interest.
They can even take your tax refunds and a portion of your social security as you age.
You agree to all that when you take on student loans.
That’s why my advice is to work super hard at becoming free from student loans by:
- Avoiding student loans altogether, or
- Paying your student loans off aggressively. Then go back to step 1 as you plan and save for your children’s education!
It’s a very important choice/decision. Choose well!