Education is a fantastic resource, however student loan debt is commonly an unpleasant side effect.
In fact, there are over 44 million people in the United States who together owe more than $1.5 trillion dollars in student loan debt and this number is only climbing higher and higher each year.
Entrepreneurs, unfortunately, fall into this category quite often. After their schooling years, they decide working for someone else just isn’t for them. While they may have fierce drive to follow their passion and create their own business, they have no idea how they will handle their student loan debt.
Starting the Repayment Process
One of our clients who went to school to become a teacher found herself in this exact position. She graduated from college with a significant amount of loan debt and was teaching and running a business from home.
After graduating she had to start thinking about repaying her loans and she knew that the repayment process is income-based. Our client decided to research different repayment programs and discovered one that would reduce the amount of payments on her loans.
We explored the program with her and found out that it only measured off of her income. If we filed her tax return “married filing separate” and didn’t include her husband’s income then they would reduce the amount of loan payments and cap the length of time that she would have to make payments. At the end of the repayment period they would forgive any remaining debt.
This program would probably have saved her around $30,000 dollars plus $4,000 every year in monthly payments. This is a significant amount of savings and seemed like a great option.
However, asking the right questions is crucial and something our team is very meticulous about.
We asked her, “What happens when the loan is forgiven?”
A loan being forgiven sounds great, right? Wrong!
Typically when a loan is forgiven it becomes taxable income.
This is a huge “gotcha!” moment that many people don’t know about because it isn’t advertised or explained.
We pointed out that she would potentially end up paying $8,000 to $10,000 dollars in tax. That was a pretty nasty realization.
Time to Get Creative
At Tembo we know there’s always an innovative solution so we didn’t stop there.
We found out that because our client is a teacher, there was a special program that she could apply to that would do everything in the first program, but would run for ten years before the balance would be forgiven.
Not only did this program cut the number of payments in half, but it would save her even more money. However, the greatest benefit was possible because she’s a civil servant.
An exception in the internal revenue code states that debt forgiveness is unactable for civil servants.
Our client went from having $60,000 dollars in student loan debt and having to pay it off in full, meaning monthly payments of at least $400, to now monthly payments of $100 for ten years and at the end of those ten years the balance would be forgiven and would never be taxed.
Overall, we were able to save our client around $50,000 dollars in loans and $12,000 of tax while saving about $300 every month in loan payments.
Our client was able to continue teaching and running her business from home while paying off her student loan debt and saving an astronomical amount of money in the process.
That’s what we like to call a win-win-win situation!