In the ever-changing world of student loans, staying on top of current events and student loan rates is critical. Below are this week’s student loan trends that could affect your loans — and your wallet.
2 current trends within student loans for the week of March 29, 2021
1. Former public servant becomes her own lawyer, discharges $41,000 worth of student loans
Katy Adams, a former public servant from Texas, recently won a personal bankruptcy case serving as her own lawyer and got over $41,000 of her existing student loan debt forgiven.
Adams’ student loan debt reportedly grew a substantial amount between 2000 and 2019. In December of 2000, she started out with $23,463; by 2019, her debt had climbed to over $40,000. Adams had made monthly payments of $185 while working her public service jobs and had applied for Public Service Loan Forgiveness in 2017, but only six of the 10 years of required payments had qualified.
In May of 2019, she applied for Chapter 7 bankruptcy. Most Chapter 7 bankruptcies cannot discharge student loan debt, but Adams decided to defend herself as her own lawyer in order to make that push. She eventually won the case and had her debt discharged – part of an emerging trend of student debtors successfully representing themselves in bankruptcy court.
How this affects students loans
Getting your student loans discharged through personal bankruptcy is tough, but it is possible. Typically when it comes to personal bankruptcy cases, the judge will use the Brunner test, which compares a borrower’s financial resources with their living expenses. Only borrowers for whom student loans would impose an “undue hardship” can see that debt discharged.
Because it’s so difficult to discharge student loan debt, bankruptcy should only be considered as a last resort. If you’re in need of assistance with your student loan payments, reach out to your lender as soon as possible, as you may have access to forbearance or deferment. Borrowers with federal student loans may also be able to switch to an income-driven repayment plan, which could lower your student loan payments to $0.
2. Many borrowers won’t qualify for student loan interest tax deduction in 2021
Many borrowers have taken advantage of federal and private student loan relief programs due to the COVID-19 crisis. Due to this, borrowers may not be able to reap the benefits of the student loan tax deduction this year.
Each year, eligible borrowers are able to deduct up to $2,500 in student loan interest fees from their taxes through what’s known as the student loan interest deduction. However, many borrowers have been paying zero interest on their student loans since March 2020, when the CARES Act went into effect — meaning they may not qualify for the usual deduction.
How this affects students loans
Many student loan borrowers won’t qualify for the deduction on this year’s taxes. That said, if you made interest payments between January 2020 and March 2020, you can claim the interest paid in those months. You can also claim the interest deduction if you’ve continued to make interest payments on your private student loans.
If you’re unsure if you qualify, contact a tax expert or use the IRS’ online tool.
Also keep in mind that while you may not be able to claim the deduction, you likely saved far more money in 2020 through the federal forbearance period. Being charged no interest is ultimately a positive, since it means you pay less on top of your loan amount.
Whether you’re new to student loans or well into repayment, it’s wise to stay informed about how your student loan rates could change. As 2021 continues, more opportunities for cheaper loans or loan forgiveness could open up; keep an eye on the Bankrate student loans news hub for the latest trends.