I hesitated when writing this post because, if I’m completely honest, I feel like this is my fault because of my student loans. I know my mom doesn’t blame me AT ALL but I feel so guilty over it since it’s really because of me. But I feel it’s important to get this out there in case anyone else has to go through the same thing so…let’s dive right in.
Parent PLUS Loan
When I was applying for college in 2003, my parents told me they would pay for it. I knew they would have to take out loans but I didn’t know much more beyond that – I knew pretty much nothing about finances at that point. So I agreed and felt very lucky that my parents were willing to pay for my education. My dad filled out all the applications and got a parent PLUS loan to pay for my undergraduate education.
After I graduated (and went to grad school which I took my own loans out for), started working and started paying off my graduate student loans, I asked my dad about my undergrad loan. He told me not to worry about it – that they were paying it back. After a lot of needling from me, he told me that the loan was for about $70,000. I had no idea that we had take out such a big loan. I guess it makes sense – looking at the numbers now, it looks like an average cost of around $30,000 a year. Who knew, college is really expensive.
Anyway, I asked him to let me help out paying for the loan but he was adamant - this was their loan, they would pay it back. He wanted me to focus on paying off my graduate student loans as well as saving for the future. I dropped the subject.
My dad passed away last year in January from cancer. It was a horrible time, the worst experience in my life. Afterwards, my mom was trying to dig through all the finances and of course, had to start paying the bills (he always took care of that). My mom is extremely smart and hard working and as much as I wanted to help her financially, she refused. Even when it came to my student loan.
In May, she called to ask about the student loan – I think to get it transferred out of my dad’s name and into her’s (or something like that) – and was told that because my dad passed away, she was eligible for loan forgiveness. She sent in the death certificate and we held our breaths. If she could be forgiven for this huge amount, it would life a huge burden from her. She already had to figure out how to pay two mortgages (they owned two houses), equity loans, car payments, bills and more – all without working full time. She was working as hard as she could as a real estate agent but there’s no guaranteed income there and especially after my dad passed away, she was in no shape to work. I wanted this for her so bad.
The call came and she was told the good news – the loan was forgiven. This meant she could immediately stop making the monthly payments as well as get reimbursed the amounts she paid from January – May. I was ecstatic. It seemed like the silver lining to a horrible situation, the only relief that could come when everything else was cloudy and gray.
The IRS Letter
Taxes was another thing my dad always took care of. My mom wobbled through it in 2011 but this year, she decided to get an accountant to do it. There were just too many deductions and different income to report that she just didn’t want to deal with it. The accountant finished her taxes and told her she owed about $7,000 to Federal and that the State would be refunding her about $4500.
She knew this might happen because although she was trying to pay taxes on her real estate income, she knew she would still owe a bunch come tax time so she had the money saved for it. State refunding her money just made it easier to pay off Federal. She sent in her taxes.
But then the IRS sent her a letter telling her that she didn’t report income.
“What income?” She asked. “I only had real estate income and that was all reported.”
Further investigation and a lot of phone calls later showed that the IRS considers loan forgiveness as income. This means that my mom supposedly had $70,000 extra income in 2011 that she had not paid taxes on yet.
No one had mentioned this to her at the time when they were talking about loan forgiveness. And as you can expect, neither of us were in the right frame of mine to ask questions about taxes either. So a year later, finding out that she had to pay taxes on this was horrible news.
The accountant called. It turned out that she now owed about $30,000 to Federal.
When she told me, I felt crushed. Devastated. Unable to help in a situation that I felt was so clearly my fault. If I had just not let them take out that loan…if I had known more about finances then…if I had forced my dad to let me help pay it back. There’s no way my mom would let me help now since we both know that my dad would not have liked it.
I tried to find a way around this for her – we had her accountant look into a 982 that might help her not have to pay these taxes, but she wasn’t eligible. There was nothing we could do.
My mom is an amazing person. She immediately came up with a plan to pay it off as well as found a silver lining to this new cloud. She told me that it was okay because at least she only had to pay about $25,000 on the loan instead of the entire $70,000. I tried to see it from this point of view but I still felt horrible. Of course, she assured me that it wasn’t my fault at all, that she was happy to pay this off but…it’s hard not to feel guilty.
Her plan is to send in part of the payment with the correction and then continue to pay it off. She’s in the process of refinancing her house and hopefully the process will be finished before she sends in this correction to the IRS. By refinancing, she’ll be able to save about $1500/month (her rate right now is really high). She’ll then put that $1500 every month to pay off these taxes as well as put any income she gets from real estate to it. It’s the best plan she has and I know she’ll work extremely hard to pay this off as soon as possible.
Be careful of loan forgiveness. It’s great that they have that – and yes, paying 33% of the loan is still much better than paying 100% of it – but know your tax requirements. Chances are that loan they forgive will still require you to pay taxes on it and you better have that money set aside so you can pay it off if not immediately, then as fast as possible.
Be financially conscious from the very beginning. Be disciplined in how many student loans you take out and try to alleviate some of the financial burden by working through college or living frugally. In my situation, I’d love to tell myself to not let my parent’s take out the loan – to try to at least contribute throughout college.
When I have kids, I want to start saving up for their college immediately. I want them to be able to go to any school they want and not have to worry about money during college. My dream would be that my kids wouldn’t have to take out any student loans – and I wouldn’t either.
I wish there was more I could do for my mom right now. Since she won’t take any financial support for me, I’m just trying to give her emotional support. I feel horrible every time she talks to me about this but I know she needs someone to talk to – and without my dad here, that job falls to me.
I just feel so helpless.