This 3 part blog reports on America’s indebtedness to the government. Whether you are a young adult that attended college, an American family that bought a home or a Senior Citizen you are probably being swindled by the government when it comes to your financial security.
Part one will look at the growing epidemic of student loan debt. A significant number of Americans have taken advantage of supposed low interest loans to fund their education. They are sold on the notion that they can go back to school, using loan proceeds, further their education and their career. This is a good notion but it is just a notion.
Student loans are easy to obtain, they carry an interest rate of 6-7% and a long term amount of time to pay it off. The loans are insured by the Federal Government so the banks have little risk in lending to students. Problems arise because the loans are often more than the student tuition. The rationale is that you can use that money for other items related to going back to college. Unfortunately, that money is often used and forgotten by the borrower until the day of reckoning, when the payments start coming due.
The government also allows a tax deduction for Student Loan Interest. All well and good, except the deduction is very small in comparison to the amount of interest a person pays. Never a good idea to take out debt just because you can deduct the interest; it never pays off to pay thousand in interest to deduct hundreds as a tax credit.
The government also defers payment on these loans for a period of time to allow you to become established in your chosen profession. The problem is the interest starts accruing from day one, so the longer time before you start your payments, the larger the balance becomes before you even make a payment.
Student loans are not forgiven by the government. If you default on a Student Loan, it will follow you in your financial life until you pay it off. Student loan debt is not dismissed under Bankruptcy Laws.
In listening to both political conventions, the candidates indicate that they know this student loan debt is at an all time high and needs to be addressed. One side says they will address it but do not say how; the other side says they will address it with refinancing the debt. Helping by refinancing the debt is laughable. It will only mean that one will pay longer with lower payments. In the end they will pay more interest on the debt.
Many people buy homes and when they have enough equity they pay off their student debt. However, your student loan will reflect on your ability to buy a home so you will need a higher income to offset the debt and be able to afford your payments. In addition, you will have to wait, often many years, for the equity in your home to be large enough to borrow to pay off the student loan debt.
What can you do? You can seek professional help before you or your student take out an education loan. You can look at the reality that the loan will come due and you may not be able to make the payments and just say no. I urge you to contact your CPA or tax advisor before you or your student take out a student loan. Our office can help you look at your budget to see if you can actually afford the tuition without obtaining loans or plan to pay any loans off as soon as possible. Stan Mroz, CPA is a full service firm offering accounting, bookkeeping, tax and consultation services. We have affordable rates to fit most any budget.
Part 2 will look at the pitfalls refinancing of houses with little or no equity under the HARP Program.