Student loan repayment programs seem like an excellent strategy to tackle debt that can’t be resolved through the bankruptcy process. As most student loan holders know — or soon realize when they approach a bankruptcy lawyer about bankruptcy — most student loan debt cannot be wiped out through bankruptcy.
For people who have a lot of student loan debt that they see no end to, a student loan repayment program that allows them to reduce the size of their monthly obligation based on the size of their incomes might seem like a great idea. The problem is that a lot of borrowers end up having to pay more than they expected as a result of the programs.
Often, these government student loan programs put an upper limit on the monthly payment obligations of the student debt holders at 10 percent of their incomes. Then, after 20 to 25 years of payments, the remaining debt will be canceled.
This sounds like a great idea, but it has a negative side. That’s because of the interest that accrues on the debt. Many borrowers end up owing and paying so much more than they would have otherwise. Also, many students don’t think about the tax obligations associated with forgiven debt. If someone has a remaining balance “forgiven,” the IRS will treat that as income and he or she will have to pay taxes on that income.
Because of the potential downsides of student loan repayment programs, King County residents may want to consider speaking with a qualified accountant and bankruptcy lawyer about their student loan debt and other financial debt obligations before making the decision to participate in such a program.
Source: Consumer Reports, “Student Loan Repayment Plans Might Be Costlier Than Expected,” Donna Rosato, Dec. 06, 2016