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Financial Tip

Oliver Wendell Holmes, former Justice of the United States Supreme Court, once said, "Taxes are what we pay for a civilized society." Although people work hard to meet their needs and the needs of their families, there are some things they cannot purchase themselves. For example, the taxes paid to state and local jurisdictions help pay for police and fire protection. These taxes also pay for the operation of the local governments, and for local recreation areas such as parks and other public facilities.

On the national level, federal income taxes help pay for defense for the country. They also pay for capital facilities such as highways and other transportation services, and to help those who are poor or ill. These are all services that individual citizens cannot purchase the way they can buy food and clothing and the other necessities of life. When people live together in a society, all of its citizens bear the cost of providing such services. Taxes are the means by which the society raises the money to cover these public costs.

The United States Department of the Treasury has a number of fact sheets that can help people better understand the various taxes imposed in the United States. These include: Economics of Taxation explains how taxes support government services and benefit the country's citizens. Writing and Enacting Tax Legislation explains the process for developing and passing legislation into law.

In addition, Lesson 1.5 of the Yes, You Can Curriculum includes classroom examples of how taxes are collected and used by the various jurisdictions.

Source: Adapted from United States Department of the Treasury.

Help for Those Having Difficulty Repaying Student Debt

As the economy has improved, Americans have gotten serious about reducing most forms of personal debt - from credit card to mortgage loans. However, a study by the Federal Reserve Bank of New York (FRBNY) found that the number of borrowers failing to make payments on their student loans five years after leaving college is rising. Only 37 percent of borrowers are current on their loans and actively paying them down, while 17 percent are in default or delinquent in their payments.

While student loans represented the lowest type of household debt as recently as 2009, researchers suggest that borrowers took out increased money for education during the Great Recession with hopes that this would help them achieve economic stability. As a result, America's total student loan debt is now nearly $1.2 trillion.

Failure to repay students loans can harm your financial future
If you cannot currently afford to meet your existing loan repayment schedule, don't ignore this important financial obligation. Failure to repay a student loan can lead to consequences that can negatively impact your credit rating; affect your ability to buy a house or a car, or get a credit card; and result in additional debt due to late fees, interest charges and possible collection fees.

To help avoid these consequences, The U.S. Department of Education provides the following options to help borrowers remain in good standing with their lender and work toward repaying their loans.

Change the payment due date
If your loan payment is due each month before your pay check arrives, ask your lender to switch the due date on your payment. Keep in mind that your account may need to be current to accommodate a due date change.

Change the repayment plan
While you may select or be assigned a repayment plan when you first begin repaying your student loan, you may be able to change plans at any time by contacting your loan servicer. The different repayment plans give you the option of extending your payments beyond the standard 10-year timeframe; starting out with a lower payment amount that increases, usually every two years; or basing your payment on your income.

You may be able to lower your monthly payment by switching to an income driven repayment plan. There are three such plans - Pay as You Earn, Income-Based and Income-Contingent - which can help you to lower your monthly payments. However, each of these plans could ultimately increase the amount of interest you pay over time. The income driven plan repayment options also have tax consequences for any forgiveness provided. To get more information about which plan is right for you speak with your loan servicer or visiting Federal Student Aid.

Consolidate multiple loans
If you have more than one federal student loan, consolidation can simplify your payments by combining multiple loans into one. This option could also lower your monthly payment. However, there are costs involved with this option as well. Restarting or possibly extending your repayment period can increase the amount of interest you pay over time. You may also lose some benefits offered with your original loans, such as interest rate discounts and loan cancellation benefits. More information is available on this option at studentaid.ed.gov.

If the options above don't work for you and you simply can't make any payments right now, you might be eligible to postpone your payments through a deferment or forbearance. However, depending on the type of loan you have, interest may still accumulate on your loan during the time you are not making payments.

 

Teachable Moments

With the costs of a college degree continuing to increase, it is important to have a realistic conversation with your college-bound student about how much debt he or she can realistically afford to carry upon graduation.

The Department of Education (DOE) provides a wealth of free information about obtaining student loans and grants, managing your loans, and numerous options for repaying student debt if you run into unexpected financial difficulty.

Caution your student to avoid online offers that target unsuspecting borrowers with loan repayment scams that misrepresent themselves as being associated with the DOE. These offers are based on false promises for loan modification options that are tied to steep upfront fees. It is important to remember that the loan repayment options provided by the DOE are free.