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Important Facts about Student Loans

Student loans are often seen as an unavoidable fact of life, but sometimes, this unquestioning acceptance leads people to make really bad decisions with loans and borrow much more than they actually need to pay for classes and books.

A student loan, like any other loan, is a huge responsibility with extreme consequences that should be considered carefully before committing yourself to thousands of dollars of debt. Here are five important facts that should weigh into your decision.

1. Student loans generally cannot be discharged in a bankruptcy. Even private student loans are banned from discharge. The only exception is when a student is able to prove that repayment would create an undue hardship, which requires a separate lawsuit and must meet several criteria, such as the inability to maintain a minimal standard of living on current income and the likelihood that this will continue through a large part of the repayment period.

2. Defaulting on a loan or missing a payment will hurt your cosigner. Every misstep a student takes over the life of that loan will affect the credit rating of the cosigner. If the student should pass away before a private loan is paid off, the cosigner may be responsible for paying it off.

3. Death or bankruptcy of a cosigner could trigger an automatic default. Some private student loans have provisions that require death or bankruptcy of the cosigner to be treated as a default, which means the student will get notices to pay the balance immediately.

4. Student loan forgiveness may have tax consequences. Generally, when a debt is forgiven, it’s considered an income to the borrower and that “income” is taxable. While some student loan forgiveness programs waive this tax liability, not all do.

5. Pay more, owe less. If you can pay extra on your loans, you’ll accrue less in interest charges. If you decide to pay extra on your student loan principal, you need to clearly state on the check and the attached bill that you are making an extra payment to reduce principal. If you don’t, the lender may just count the extra as a regular payment and move your next due date back, which means the extra payment won’t be as helpful in reducing your interest.

Student loans can be an important way to invest in your financial future. But you must be mindful of the consequences and stipulations when deciding how much to borrow, and who to borrow from.

About Dennis M. Postema

Dennis M. Postema, RFC, is a successful entrepreneur, best-selling author, coach, speaker and registered financial consultant. He is the founder of MotivationandSuccess.com, StoriesofPerseverance.org, FinancingYourLife.com and TheRetirementInstitute.org.

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