There were three different options for educational tax breaks this year, and each student could choose one. I tested the system, and if I had paid $12,000 in college costs during 2007, my highest potential tax credit would have been $2,000. The problem is, most college students are paying far more than $12,000 per year, and yet their tax break stays limited to about $2,000.
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When high school students apply for college financial aid, they usually receive a package heavy in loans and light in grants. For most of the 1990s, students signed for their loans without thinking twice about the interest rates they were agreeing to. But during the 1990s, when student loan agencies like Sallie Mae vastly grew in power, students learned the sour truth about paying back loans: Interest rates are killer. Loan companies encourage repayment methods that look good (low monthly rates), but the fine print reveals it can take over twenty years to finish making payments on such a schedule. By the time the loan is paid off, usually about 25% of the payments have gone towards interest. Students do not usually notice that of their monthly payment, 50% or more is going to interest, not the actual loan ("principal").
However, bitter students saddled with enormous debt are doing something about it. They are educating current students to beware of loans, and they are petitioning the government to limit the power of loan companies.
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The consequence of student loan debt is hard. The average debt upon completion of a four-year college degree is $20,000. Students with an advanced degree have a debt closer to $100,000. In the past eight years, student debt has grown by 60%. What usually happens is that the student comes out of a four-year program, enters their first job, and approaches the payment of their loan without any financial education. Unless they studied business or finance, they have no idea how to handle their finances. They do not understand the consequences of delaying their loan or making late payments. They also make the mistake of trusting the loan agency. They sign up for marketing frauds that promise lower interest rates. They make late payments and do not understand the consequences on their credit rating. Then, when they apply for their first home loan, they are shocked when banks deny them. At this point, their credit rating is low; they do not qualify for a home loan.
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Students cannot hide their credit history from banks. The bank uses an application processing system with a computer software business process management tool to determine the person's credit history and loan eligibility. Many banks rely on such tools to make final decisions. With recent bank failures and a difficult recession in play, banks are more likely than ever to deny loan applications. They cannot take the risk on some young person who did not pay their student loan on time.
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Students were relieved to see tax break options this year, but tax breaks are not enough. Students are taking their complaints further. The "Student Debt Alert" is a national campaign meant to teach students how student loans can influence their adult life. SDA gives speeches, demonstrations, and encourages students to speak out to the government through petitions and letters. The SDA wants to reform student loan programs, increase student aid funding, improve loan forgiveness policies, and loan refinancing options. Some reform has happened as a result of this activism, and general awareness about student loans is increasing.
