August 27, 2014 THE VILLADOM TIMES I • Page 11 Know what is at stake before taking student loans With student loan defaults at historic highs, students and their parents need to understand the ramifications of defaulting on a student loan. Certified Public Accoun- tants caution parents to think carefully about co-signing for a student loan and to be sure they understand what it could mean to their own financial future. Only private student loans, such as those through a local bank, require co-sign- ers. Federal student loans – 93 percent of student loans are now issued by the gov- ernment – do not require co-signers. Gov- ernment-backed student loans typically offer lower interest rates and more flexible repayment plans. Investigate all options before co-signing anything. In the best case, the student graduates and starts a successful career, allowing the young professional to make all regular pay- ments. A co-signed student loan, however, is listed on both the parent’s and the child’s credit reports. This extra debt can easily prevent a parent from getting additional loans if needed or refinancing a home. Even if the child is a success and is making all the regular payments, the debt service is counted as an expense to the parents. If something happens and the graduate cannot afford to make the payments, the parent’s credit report is going to take a big hit. If a parent or student defaults on a stu- dent loan, the government is not going to let either one walk away from the debt. The government has many options available to recoup its losses: Tax refund offsets: The Internal Rev- enue Service can claim any income tax refunds to which one may be entitled until student loans are paid in full. Garnishment of wages: The government can garnish a limited portion of the wages of a student loan debtor who is in default. It can take up to 15 percent of disposable income. It cannot, however, take more than the equivalent of 30 times the current fed- eral minimum wage. Federal benefits: The government can take some federal benefit payments (includ- ing Social Security retirement benefits and Social Security disability benefits, but not Supplemental Security Income) as reim- bursement for student loans. The govern- ment cannot take any amount that would leave an individual with benefits less than $9,000 per year, or $750 per month, and it cannot take more than 15 percent of a per- son’s total benefit. Legal action: The government and pri- vate lenders can sue to collect defaulted student loans. Unlike other debts, there is no time limit on suing to collect student loans. If a parent or child is having trouble repaying a student loan, the first thing to do is contact the lender to try to arrange an easier repayment plan. Bankruptcy is not going to be an option for those having serious trouble paying back their debt. Unlike credit card debt or automobile loans, student loans are virtu- ally impossible to discharge in bankruptcy. Unless an individual can show that an edu- cation loan payment is an undue hardship on him or her and his or her family and dependents, student loans are ineligible for cancellation (discharge) in bankruptcy. It is difficult to prove undue hardship unless an individual is physically unable to work and there is no chance of making money. To discharge student loans under this special case, one must file a separate motion with the bankruptcy court and present the situa- tion before a judge. If student loans are the largest part of a person’s debt, he or she is better off not filing for bankruptcy because courts are reluctant to discharge student loans. Be sure to plan for the funding of an entire college education before the first semester. To get an idea of what student loan payments will look like, visit FinAid, a free financial aid information website for students and their families, at www.finaid. org/calculaors to do the math. A CPA can help plan a budget that will help meet finan- cial goals and fund college education. To locate a CPA, visit findacpa.org. To find more information on various per- sonal financial matters, visit the New Jersey Society of Certified Public Accountants’ public service website at MoneyMattersNJ. com. Visitors to this website are invited to subscribe to Your Money Matters, the NJSCPA’s free, monthly e-mail newsletter to receive valuable personal financial plan- ning advice throughout the year.