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Money Talk: Loan Forgiveness May Carry Tax Bite

Question: You recently wrote about tyro loan forgiveness. After 15 years as a open defender, my mother was diagnosed with mixed sclerosis and could no longer pursue her career as a lawyer. She practical for redemption of a sovereign tyro loans she used to attend law school. About 3 years later, a loans were forgiven.

The premonition is that she was compulsory to compensate income taxes formed on a change that was erased. The taxes amounted to $63,000. Getting a loan forgiven was easy compared with coughing adult a income for a IRS. we suspicion this should be mentioned.

Answer: The IRS generally considers forgiven or canceled debt as income to a borrower. There are several exceptions, however.

Borrowers don’t have to compensate income taxes on tyro loans forgiven by programs that need them to work for a specific series of years in a certain profession. So open use loan forgiveness, law propagandize amends assistance, clergyman loan redemption and a National Health Service Corps’ loan amends module won’t trigger taxes.

Forgiven debt also competence be released from income if a borrower was ruined during a time.

Student loan discharges for death, disability, sealed schools, fake acceptance and delinquent refunds typically are deliberate taxable income, however.

Forgiveness of remaining balances underneath income-based amends programs after 20 or 25 years of remuneration is also deliberate taxable.

The taxes due will be a commission of a volume forgiven, formed on your taxation bracket. If you’re in a 25 percent sovereign bracket, for example, you’d compensate $25,000 for $100,000 of forgiven debt, and any state and internal income taxes. It’s reduction than a add-on we owed, of course, yet as we note it can still be a tough check to pay.

Question: My partner of 30 years recently died. Am we authorised for Social Security survivor benefits?

I don’t wish anything we don’t deserve, yet if I’m entitled to something, each penny would be appreciated. we am 54 and make smallest wage.

Answer: Your eligibility for Social Security advantages as a associate depends on 3 factors: either your state recognizes same-sex marriages, either it did so on a date your partner died and either we were legally married. (You wrote “partner” rather than “spouse,” that suggests we competence not have been.)

The Supreme Court paved a approach for Social Security to offer same-sex advantages when it ruled tools of a sovereign Defense of Marriage Act unconstitutional final summer. Social Security has taken a position that it contingency follow state law in noticing same-sex marriages and that what matters is where a integrate live, not where they married. Even in states where same-sex matrimony is now legal, Social Security denies survivor advantages if it wasn’t authorised when a associate died.

If we are eligible, we can start receiving advantages as early as age 60. (Survivor advantages are accessible during any age if a widow or widower takes caring of a child receiving Social Security advantages who is younger than 16 or disabled.)

Starting early reduces your survivor advantage significantly compared with what we would get if we wait until your full retirement age of 67. As a survivor, though, you’re authorised to switch to your possess advantage later, if that advantage is larger. (That’s opposite from wedding benefits, where spouses are precluded from switching to their possess advantages if they start removing Social Security checks before their possess full retirement age.)

If your survivor advantage is expected to be incomparable than any advantage you’ve warranted on your own, though, it typically creates clarity to check starting Social Security as prolonged as probable to maximize what you’ll get.

Question: Someone recently asked we about either they were obliged for their mother’s credit label debt, and during a finish of your answer we suggested she speak to a failure attorney.

How can we foster that kind of irresponsibility?

Answer: Some people are utterly organisation in their faith that failure should never be an choice — even for aged widows on bound incomes with no wish of ever profitable off their debts.

But if adequate things go wrong in their lives, these anti-bankruptcy folks competence find themselves beholden that there’s a authorised approach out of a debtors’ jail that their lives would become.

Liz Weston is a author of The 10 Commandments of Money: Survive and Thrive in a New Economy . Questions for probable inclusion in her mainstay competence be sent to 3940 Laurel Canyon, No. 238, Studio City, Calif. 91604, or by email during Distributed by No More Red Inc.

Will new student loan options make a dent in debt?


HARI SREENIVASAN, PBS ANCHOR: Student debt is something millions of Americans live with for years — even decades after they graduate college. Now, two of the nation’s largest private student lenders are rolling out options that will allow borrowers to modify the terms on their loans.

For more about the significance of this, we’re joined now by Marian Wang, a reporter with ProPublica and by AnnaMaria Andriotis. She is with the Wall Street Journal.

So AnnaMaria, let me start with you. Explain the change. What kinds of modifications are we talking about? Who does this apply to?

ANNAMARIA ANDRIOTIS, THE WALL STREET JOURNAL: So we’re talking about declines in the interest rates that student loan borrowers are paying. And this announcement came out of Wells Fargo this past week. Wells Fargo is the second largest private student lender, and what they have decided to start doing is to lower the monthly payment by essentially lowering the interest rate to as low as one percent for borrowers.

That’s significant because actually many borrowers have private student loans with interest rates that are 10 percent or higher than that. So what they’re starting to see is significant declines in what they’re paying monthly.

HARI SREENIVASAN: And banks didn’t want to do this. Why did they go forward with this?

ANNAMARIA ANDRIOTIS: This is a significant turnaround, and there’s a lot of discussion as to what has led to it. What we know is that over the past couple of years the Consumer Financial Protection Bureau has been applying a lot of pressure on private lenders, basically telling them that they need to start offering repayment options similar to what the federal government offers on its loans. The federal government offers a lot of flexibility for borrowers, in particular those who don’t have high salaries.

So there’s been a lot of back and forth between the CFPB and private lenders. In addition, from the private lender side, what we have started hearing is that there have been a lot of internal discussions at banks about how do we increase loan revenue going forward? If we alienate student borrowers — people who are right now in their 20s and early 30s — down the road when it comes time for them to get a mortgage or when they’re looking to establish some type of banking relationship, we might not get those borrowers. They might go somewhere else.

HARI SREENIVASAN: Right, right, right. So Marian, put this population in perspective for us. Because as she mentioned, the federal loans have already been doing some of this in the past. And how much can an average kind of borrower save if they qualify for this modification, do you think?

MARIAN WANG, PROPUBLICA: Well, just to give a little more context, the pool of private student loan borrowers is vastly outnumbered by the pool of federal student loan borrowers. And the feds originate a vast majority of student loan debt. And you’re absolutely right that the feds have for a long time offered income-based repayment plans, things that will help you sort of scale your monthly payments to something that’s reasonable for you if you qualify for those programs.

HARI SREENIVASAN: Right. So is there an idea, is there kind of a benchmark that they know about what income level this is going to hit someone at, and if they go from 10 percent to one percent, that’s obviously a significant saving, but it also, I guess, depends on how much they have in debt, right?

ANNAMARIA ANDRIOTIS: Sure, so what Wells Fargo, at least, has said is it’s going to look at their overall debt by looking at the borrowers credit reports and they’re looking at their income, and they’re hoping to come to something like a monthly payment that equals about 10 to 15 percent of their income.

Now, what’s also interesting is that Discover, which is the third largest private student lender in the country, is also planning on rolling out loan modifications early next year. What we’ve heard from them is there are potentially even more significant breaks that are being considered. For instance, loan forgiveness, which is something totally unheard of that a private lender would have never even considered up until recently.

And it’s important to point out that private student borrowers, though dealing with a lot of difficulties, as Marian pointed out, are a small share of the overall borrowers out there. So private student loan debt accounts for about eight percent of outstanding student loans. We’ve seen a lot of back and forth between lenders and the CFPB. Lenders are saying, why are you picking on us when the federal government accounts for the majority of that out there.

HARI SREENIVASAN: Alright, so Marian, what about the role that parents play in this? A lot of parents take out private personal loans on top of whatever the financial aid package is that the university can give, right?

MARIAN WANG: Well, yeah, and there’s actually a federal program that’s specifically geared at parents that I did a report on a couple years ago. It’s interesting because federal student loans to students in particular are capped at a certain level. You can only borrow so much in a year. And so, there’s not a lot of underwriting and that’s why there’s a cap.

This federal program for borrowing specifically geared toward parents, actually it’s called the Parent Plus program, and that’s an interesting program because those programs aren’t capped. You can take as much out as you need. There’s very limited underwriting for those loans. And that program is interesting because you see a lot of the financial strain that families face through that program because it’s not capped.

And so you can see more parents taking out more loans, taking out larger loans through this program over time. You’ve really seen it especially in the last five years.

HARI SREENIVASAN: So are those loans through the Parent Plus Program at greater risk for default if, say for example, a parent may not have a steady income coming in but they still qualify to take out a huge loan to get their kids through school.

MARIAN WANG: Absolutely. That’s something we looked at. There’s very limited underwriting where they don’t look at your debt-to-income ratio, like a private lender would. And they can take out vast amounts of money, as much as they need, essentially, to help their kid out, and a lot of parents do. That’s absolutely a thing that parents can get overextended in doing so.

HARI SREENIVASAN: And what about the roles that colleges and universities play in this too? I mean, there doesn’t seem to be that much transparency in figuring out exactly what  the financial aid package is and why once student got this much and another student got this much, when perhaps their parents made the same, right?

ANNAMARIA ANDRIOTIS: Well, what’s playing out, the reason why we’re seeing more borrowers, more students come out of school with more debt is because college tuition costs keep rising, right? And what become very confusing for families is when financial aid packages go out to students. And most schools, what they do is they include student loans as part of the financial aid package — federal student loans, that is — but one would argue is to how much of aid is a student loan when a student loan is something you have to pay back. It’s not like grants or scholarships, for example.

So colleges for sure do play a large role here. And there’s been this ongoing debate about why should, for instance, the federal government keep giving out more and more aid? It’s essentially incentivizing the colleges to continue increasing their tuition because they’re saying, well, the money’s got to come from somewhere, someone’s going to pay for it.


MARIAN WANG: And to your question, too, I think absolutely, schools need to be brought into this. Schools have their own pot of financial aid, essentially. And there’s a sticker price, but they discount it heavily depending on what kind of student you are. And so they have your financial information and they are essentially moneyballing financial aid these days.


MARIAN WANG: There’s a whole industry called enrollment management. There didn’t used to be enrollment managers at schools, you know, two decades ago. But that’s a position that’s sort of been created, essentially to use data, to really create detailed student profiles and do what they call — this is all jargon — but it’s “financial aid leveraging.” How does the school get the biggest bang for its financial aid dollar?

And sometimes that means they’re essentially picking students that they are OK having overborrow, versus students whom they really want and will generally try to protect from having to borrow. And so they’re trying to incentivize certain students coming and certain students they care less about and they’re more comfortable, honestly packaging a student loan in that financial aid package. And that’s a decision that schools are making, picking which students essentially get more, and which students will have to borrow more.

And I think that should definitely be put on schools. The other thing I think is really important to bring up is that it’s on schools to make sure that kids are graduating on time with a meaningful degree. And the surest way to get in over your head with student debt is to drop out and have debt for college and nothing to show for it. You don’t have that credential. You don’t have that higher earning power.

That’s a huge source of debt, and that’s really a terrible situation for a student to be in. The other thing is graduating on time. It’s a sure way to get more debt if you stay six years versus your peer who’s able to get out in four.

HARI SREENIVASAN: Alright, Marian Wang from ProPublica and AnnaMaria Andriotis from the Wall Street Journal, thanks so much for joining us.


MARIAN WANG: Thanks for having us.

Have plan to pay back student loans on timely basis

Statistics tell us that the typical student graduating from a four-year college has eight to 12 federal and private student loans, according to Mark Kantrowitz, senior vice president and publisher of Edvisors and author of “Filing the FAFSA.”

“It is easy for one of those loans to get lost and, inadvertently, go into default,” Kantrowitz said.

Last week, we talked about the consequences of default.

This week, let’s discuss some tools that can prevent default.

Get a handle on all the loans outstanding. The best way to do that is to access the National Student Loan Data System online at NSLDS, the U.S. Department of Education’s central database for student aid, receives data from schools, guaranty agencies, the Direct Loan Program and other Department of Education programs.

There you will find a list of the student’s federal education loans and loan servicers, but not the parents’ PLUS loans. Parents can log onto the same NSLDS site to look up their PLUS loans using their own PIN numbers, not the student’s.

Another resource is the college’s financial-aid office. You also can access this information through the three major credit bureaus. Students can get a free copy of their credit reports once a year at

Review the loans. Make a list of them, noting the payments due and payment due dates. Put the due dates on a calendar.

Make sure the student’s address is noted correctly on the loan servicers’ records. If mail is not received by the borrower, that’s no excuse for delaying payment.

Don’t wait for a letter from the lender asking for money. Again, payments are due on time even if the student is not notified of due dates or payment amounts.

Decide on a repayment plan. The default is a standard 10-year repayment plan, which has the shortest repayment terms. Here is a rule of thumb from Kantrowitz: “So long as the total student loan debt is less than the borrower’s annual income, the borrower should be able to afford the monthly loan payments under standard repayment.”

Automate repayments. Each month, the graduate’s bank should be debited in the amount of the monthly payment due to the lender. Automatic debits will help prevent tardy or missed payments. Plus, some lenders reduce the interest rate due on the loan when an auto-debit is set up. The reduction can be as much as 1/2 of 1 percent.

To simplify matters, graduates with many loans might consider consolidating them. However, it’s important to review terms before doing that. For more information on consolidating federal student loans, go to For private consolidation loans, go to

Consider accelerating repayment of the loans. Graduates need to be aware that there are no prepayment penalties on student loans, both federal and private.

If a co-signer needs to be released, consider private consolidation. The student can go to a bank to refinance his or her loans on his or her own credit record without the co-signer. Federal education loans do not require co-signers, so there’s no need for co-signer release on federal loans.

Understand tax breaks. Student loan interest payments are tax-deductible. Up to $2,500 in interest paid on federal and private student loans can be deducted on federal income-tax returns each year. There is no need to file a Schedule A for itemized deductions in order to claim the student loan interest deduction.

Understand when to get help. If the graduate runs into a problem making payments, don’t be silent. Talk to the lender. Help is possible through deferments and partial forbearances (temporarily suspending repayments of principal; requiring interest-only payments).

Federal student loan borrowers need to study the official U.S. Department of Education site at

Another resource is Edvisors publishes free sites of continually updated information as well as tools to help students and families plan for and pay for college.

Next week, let’s talk about applying for student loans.

Julie Jason, a personal money manager in Stamford, Conn., can be reached at

Interest rates could be heading higher

Are you carrying a big credit card balance? Or maybe you’re considering taking out a mortgage or other loan.

If so, it’s time to start worrying, at least a little bit.

With the U.S. economy gaining momentum, economists generally expect the Federal Reserve to start raising interest rates next year. Although a major boost seems unlikely, any upturn will increase borrowing costs for consumers.

“From a borrower’s perspective, the writing is on the wall,” said Greg McBride, chief financial analyst at North Palm Beach, Fla.-based interest rate tracker

The last time the Fed raised the federal funds rate was in 2006. Since then, the rate plummeted to a target range of zero to 0.25 percent, where it’s been wedged for the last six years. Similarly, the prime rate, used as a benchmark for a variety of consumer loans, has been stuck at 3.25 percent.

For now, the outlook is for the Fed to engineer a couple of quarter-point rate hikes in the second half of 2015, Mr. McBride said.

Those increases would most directly affect rates charged on variable-rate credit cards — almost all credit cards these days have variable, not fixed, rates — home equity loans, adjustable-rate mortgages, and student and auto loans.

Fixed-rate mortgages — which were averaging 3.99 percent on a 30-year loan last week, according to Freddie Mac’s nationwide survey — should head higher even earlier, Mr. McBride said. “You’ll likely see them begin to move up as the timetable for Fed action comes into focus,” he said.

With the economy mending well and in less need of stimulus, the Fed will have more leeway to raise rates in an attempt to keep inflation in check.

In addition, the Fed needs to “reload the gun” for the next recession, Mr. McBride said. “There will be pressure on [Fed policymakers] to put a few rate increases under their belt just so they have some ammunition for the next time the economy rolls over.”

For borrowers, the message is clear.

“Whether interest rates go up a little or a lot remains to be seen, but they will go up,” Mr. McBride said. “There’s no better time than the present to use the tailwind of low interest rates to pay down your debt.”

On the flip side, if borrowing rates go up, that’s generally good news for savers.

Still, any improvement in deposit rates likely will be muted.

“I think savers will end up trailing the rate of inflation for the foreseeable future,” Mr. McBride said.

“With inflation right now running at 1.7 percent annually, and the top-yielding online savings accounts paying 1 percent, the Fed would have to raise rates a few times, and you would still be trailing inflation.”

The other factor that likely will restrain deposit rates is that for most banks, loan demand has not picked up enough for them to aggressively court deposits.

Many banks “won’t feel compelled to raise deposit rates because they already have more deposits than they are able to lend out,” Mr. McBride said.

How a Little Student Loan Deal Could Spell Big Trouble for Borrowers

The Reuters headline is big and bold: “Wells Fargo to sell $8.5 billion of federal student loans to Navient.”

If you’re thinking, “It’s hard to get all worked up over an $8 billion deal when there’s more than $1.2 trillion-worth of loans out there,” think again.

The contracts that Wells Fargo Corporation is selling to Navient represent loans that were made under the now-defunct Federal Family Education Loan program. FFELs are government-guaranteed student loans that were originated by a network of banks and other private-sector lenders. Approximately $300 billion are currently outstanding, of which Navient is reportedly the single largest owner/administrator.

Government-guaranteed consumer debts—whether they take the form of residential mortgages or education loans—make for very appealing investments to yield-hungry but risk-averse investors. That’s because for all the reckless, politically-motivated bluster, everyone knows that when push comes to shove, the U.S. government always honors its financial obligations.

Navient should have little trouble financing this acquisition, probably the same way it and its former corporate parent, Sallie Mae, have financed much of their previous FFEL purchases: securitization. In this case, though, that task will be a tad less difficult to accomplish, thanks to the financing facility that Wells Fargo is setting up to help complete the sale.

So why should a deal that amounts to decimal dust in the scheme of things attract more than passing attention?

Well, ever since the feds terminated the costly FFEL program in 2010, the government has been lending money on a direct basis to college students and to their parents, to the tune of some $600 billion that now resides on the DOE’s balance sheet.

Given the recent shift in the balance of power to more conservative mindsets, it’s a safe bet that pressure will be brought to bear on the department to shrink the size of that balance sheet by selling all or part of its education-loan portfolio. The money the government borrowed to fund that activity in the first place would then be repaid from the proceeds.

The political benefit is obvious.

Loan sales worth $600 billion will generate enough cash to retire roughly the same amount of government borrowings. Therefore, the party that pulls that off can rightly claim to have engineered a substantial reduction in the national debt. (Of course, that doesn’t account for the forgone value of the deficit-reducing profits that this lending program continues to generate, but that’s a discussion for another day.)

If the DOE does indeed end up feeling compelled to lighten its load—which is likely because of the consistently high demand for Federal Direct Loans—what form would the transactions take and to whom would the contracts be sold? Hint: Look to the Wells Fargo-Navient deal for direction.

And therein lies the problem.

What About the Borrowers?

The reason why so many loan-servicing companies are the subject of consumer ire and regulatory action is because these firms first attend to the interests of their benefactors—the lenders and investors that originate and own the loans—before those of financially distressed borrowers in need of assistance or the taxpayers who are left holding the bag when they end up defaulting.

So when lawmakers talk about reducing the deficit and if downsizing the DOE’s portfolio becomes an integral component of their plan for accomplishing that, it’s important they use the size of a prospective deal to good advantage.

Loan originators that negotiate their own financing transactions are in the best position to bargain for terms that can reasonably satisfy everyone’s interests. In this instance, the DOE would get to pay off its debts, investors would earn a fair rate of return with little downside risk (thanks to the government’s backstop) and distressed borrowers would gain unfettered access to the relief they need. (Of course, the financial-services industry stands to make a fortune in investment banking fees for putting that all together, but that too is another matter for another day.)

The point is this: That “little” deal between Wells Fargo and Navient is a harbinger of things to come. Sometime soon, a mass of Federal Direct Loans is going to find its way into the private sector. When that happens, let’s hope that lawmakers will have already devised a plan that does right by borrowers and taxpayers alike.

This story is an Op/Ed contribution to and does not necessarily represent the views of the company or its partners.

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This article originally appeared on

Mitchell D. Weiss is an experienced financial services industry executive and entrepreneur. He is an Executive in Residence at the University of Hartford, a member of its business school’s board and co-founder of the university’s Center for Personal Financial Responsibility. His books include Life Happens: A Practical Course on Personal Finance from College to Career
Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses and Professional Practices—both of which are now undergraduate courses that Mitch teaches at the university and elsewhere.