The financial strain of student loan repayments is a reality for millions of borrowers like Azereth Deason, who currently owes more than $18,000 in undergraduate loans. With the recent resumption of loan payments after a three-year hiatus due to the pandemic, the worries around repayment are on the rise for many.
Deason, a 24-year-old New York City resident, is among the nearly 9 million borrowers who haven't made a student loan payment since the resumption of student loans in October 2023. The temporary relief provided during the pandemic allowed individuals to focus on pressing matters like rent, bills, and healthcare. And while the immediate impact of missing payments may not be felt, experts caution that financial consequences may arise later.
Tax Breaks and Forgiveness
Thanks to a provision in the 2021 American Rescue Plan, borrowers eligible for student loan forgiveness won't be taxed on the forgiven amount until the end of 2025. This rule shields borrowers from the typical tax implications associated with discharged debt, providing a temporary financial reprieve.
Mike Pierce, the executive director of the Student Borrower Protection Center, emphasizes the challenges faced by millions in restarting loan payments after an extended period of no bills and no interest. He notes, "This was a system that wasn't built to restart loan payments for more than 20 million people on the same day."
Avoiding Default and Tax Consequences
Borrowers are advised to avoid defaulting on loans to prevent adverse consequences such as tax refund garnishment. The Biden Administration's 12-month on-ramp to repayment program currently shields borrowers from penalties until September 30, 2024. This means that missing a payment won't lead to default or credit bureau reporting during this period.
Alison Flores from the Tax Institute at H&R Block warns that after 2025, borrowers in default may face an offset request on their accounts, potentially reducing or deducting their entire tax refund. Additionally, non-payment could impact credit scores and eligibility for broader loan forgiveness programs.
Understanding Why Borrowers Aren't Paying
A Department of Education report from December revealed that 40% of student loan borrowers hadn't made a payment by mid-November 2023. Research from the Philly Fed indicates that nearly a quarter of borrowers expected to struggle with payments or not make them at all post-pandemic.
Of those who haven't made any payments since October 2023, 63% cited financial inability. Izabella Nuñes, a 24-year-old in New York City, shares her struggles and highlights the common sentiment among peers. Nuñes remains hopeful that the government will address the issue, as millions find themselves unable to make payments.
Mike Pierce notes that mismanagement by loan servicers has also contributed to non-payment, with 3.25 million borrowers not receiving timely billing statements, according to the Education Department.
Benefits for Borrowers Making Payments
For those managing to make payments, there's a silver lining. Borrowers can take advantage of a federal tax deduction of up to $2,500 on their tax return. This benefit applies to all loans, with income restrictions. Single borrowers earning $75,000 or less can claim the full deduction, while those earning up to $90,000 can earn partial credit. Those married and filing jointly cannot claim a deduction if their modified adjusted gross income is $185,000 or more.
Flores recommends ensuring borrowers have received a 1098-E form, or a student loan interest statement, from their lender to claim this deduction. Accessing this form through the online student loan portal or checking emails for related information is crucial.
Navigating the return of student loan payments can be complex, but understanding the current scenarios and available benefits is essential for borrowers. Those facing challenges should know that they are not alone and that exploring available resources and assistance programs can make a significant difference in managing student loan obligations.