Student loan interest can now be used as a tax deduction on personal income tax returns, thanks to changes made the United States government and the IRS. New student loan interest rates went into affect on August 1, 2005, changing the previous one. This can greatly help students and parents at tax time.
Despite a federal government initiative to encourage higher education over the past few years, with the offer of deferred loans that include much lower rates than regular or private types of loans, and put off pay back until a student has completed their studies, the impact on new and existing loans is the same. Interest builds over time and interest is made on the balance, which will eventually include some of the interest, itself. The result is that despite less worry about finance during the educational period; the final balance is much higher than before, affecting students’ financial situations and income tax returns.
Initially the government offered a two-pronged opportunity to student loan candidates. The first is subsidized; whereby the government covers the interest until a student’s education is completed because the student’s need for financial aid is higher. The second is unsubsidized whereby the student is fully responsible for dealing with any interest on top of the loan. Private and other student loan creditors also provide a deferred type of personal loan, but the interest rates are higher, the loan is unsubsidized, not necessarily following the government’s strict guidelines, and the student is fully responsible again for paying interest upon interest plus the original loan balance. The private and other sectors have made a high profit industry out of student loans and unfortunately many students do not fully comprehend how interest upon interest works. In a sense, even though some most private creditors do follow government’s rules, debt management and credit counseling services do in fact aid their own profits instead of truly helping students by encouraging them to take out further loans to consolidate their student loan debts which costs students even more money. It is imperative for parents and students to be fully cognizant of their student loans’ conditions and terms, government or private, but most importantly students need to be managing their money by paying of interest as and when it is applied each month. In other words, loan payments may be okay to defer, but do not defer paying the interest.