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Debt Management Plans Should Include Educational Loans
By Clinton Maxwell
There have been a lot of changes in the way student loan interest can be handled for tax purposes. For example, the Internal Revenue Service and the U.S. Government have now included student loan interest as a tax deductible item on personal tax returns. In addition, the previous cap on maximum loan interest rates was repealed and new rates when into effect. So, what does all of this mean? Well when the new rates were announced lenders immediately began advertising campaigns to have students consolidate existing loans in order to lock in the older lower interest rates. The belief was that the newer rates would impact tax returns as the students (or their parents) began to repay educational loans.

In order to understand how a change in interest rates can have a huge effect on student loans and student taxes, one needs to have a basic understanding of debt management. For example, interest rates on the unsubsidized or privately issued loans will begin accruing from the date the loan is issued and continues to compound upon itself. Thus, deferred payment loans that also defer interest payments can generate an extremely large amount of additional debt for any student. This impact is lessoned on the federally subsidized loans as subsidized loans to not generate interest in this way.

In an attempt to promote the advancement of higher education, the government has allowed interest paid on student loans to be noted as a deduction on individual tax returns. Meanwhile, the deferred payment options allow a student to attend the university and defer payment of the student loans until completion of the degree. The loans come in both subsidized and unsubsidized forms. Subsidized as reserved for those students able to show a financial need and the government pays the interest


accrued until the student completes their degree or leaves school. Unsubsidized student loans are not based upon need and the student is responsible for paying interest as it accrues on the loan. There are lenders who will offer deferred payment loans simply because of their income generating power for the underwriting financial institution. And in fact, there are lenders who have made a complete business out of providing deferred payment student loans which are targeted toward students who either do not realize or perhaps do not understand the concept of the interest charge incurred on interest accrued.

Student loans, and more specifically deferred payment student loans, that are offered within the boundaries of the federally subsidized or unsubsidized guidelines, are extremely helpful to students and parents who are trying to scrape together enough money to meet college funding needs. However, both parents and students need to be better educated in the terms of the debts they are incurring. Short of taking part in credit counseling to gain that understanding, however, both should take the time to read carefully the loan papers and the terms and conditions attached to them. They should also try, if possible, to pay the unsubsidized interest payments as it accrues. The money they saved would be a great start to a retirement fund upon graduation.


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This page was updated on Nov 2009 and is Copyright © 2003 by Global Com Consulting Inc.