Student Loan Interest
As a parent or student, the need to be informed about the
benefits of student loans, the extremely low interest rates, and
the tax benefit they provide has increased tremendously over the
last few years as education costs have risen, and the need for
every deduction and credit has also increased. The Internal
Revenue Service and the US government have now included student
loan interest as a tax deductible item on the personal tax
return. The second, and perhaps most important reason, is due to
the fact that interest rates on student loans are beginning to
climb, several percentage points. As of August 1, 2005, the
previous cap on the maximum student loan interest rate was
repealed, and the new rates went into effect; what is the effect
on existing student loans? What will the effect be on new
student loans? How does this affect the bottom line of the
students or parents tax return? These are questions that parents
and students alike are seeking the answers to, prior to the rate
change. Many of the organizations that offer student loan
consolidation programs urged students to consolidate existing
loans in order to lock in the low interest rate, while still
available, as the new rates would definitely impact tax returns
as the student begins to repay the loan, or the parent repays
the loan.
Interest rates on federally subsidized loans do not have the
tremendous impact on a student's finances when compared to
unsubsidized or private issue loans. Deferred payment loans that
also defer interest payments can generate extremely large
additional amounts of debt for a student borrower because the
loan is accruing interest on interest charges. Now, can you see
how a change in interest rates would have a huge affect on
student loans and student taxes?
In order to promote the advancement of continued education, the
government has, over the last several years allowed the interest
paid on student loans be a deduction on your tax return. This
has helped ease some of the expense of college, but it isn't a
direct form of relief. The individual claiming the deduction
simply gets a portion of the interest deducted on their itemized
schedule of deductions; it's not a dollar for dollar credit.
Deferred payment loans originally existed to create a buffer for
the student borrower trying to attend school and work enough to
keep up daily needs. Deferred payment allows the students to
borrow, attend school without the worry of monthly loan
payments, and then assume the responsibility for monthly
payments upon completion of their degree. The government offers
deferred payment loans to students in two forms, subsidized and
unsubsidized. The subsidized loans are for students with a
demonstrated financial need; the government pays the interest
accrued until the student has finished or left school.
Unsubsidized loans are not need based; the student is
responsible for interest as it accrues on the loan. Either way,
the interest is taken care of and paid monthly.
There are lenders today, who offer deferred payment loans simply
because of the income they generate for the institution
extending the loan. Students, who do not pay interest as it
accrues, will pay interest charged on their interest balance
each month. Many reputable lenders see this as an exploitation
of the student, and do not even offer such a product. Private
loan products offered through lending institutions, where there
are no federal lending requirements associated with this
particular loan product and the student's school status in
relation to financial need, have made a business of deferred
payment loans. These very profitable loan products are often
offered to students, who do not realize or necessarily
understand the concept of the interest charge incurred on
interest accrued.
Deferred payment loan products offered within the boundaries of
the federally subsidized or unsubsidized guidelines are
tremendously helpful to students and parents during these lean
years of college funding; some of the private loan products,
however, merely take advantage of the financial needs of student
borrowers. Read carefully the terms and conditions of your loan
and if offered the opportunity, make interest payments as the
interest accrues. Your student loan debt at the end of the
deferment period will be much smaller if the interest due each
month has not been added to the amount due each month. In this
way, you are only making interest payments, which are easily
affordable, and you get to deduct the interest each year from
your tax return.