You’re Giving the Government an Interest Free Loan and You Don’t Even Realize It

BY: - 3 Apr '17 | Money

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Would you lend the government money interest free? Sounds crazy, doesn’t it? But that’s exactly what millions of us do every year when we receive our IRS refund.

Your refund may seem like a gift, but it’s actually not. We receive a tax refund simply because we paid the IRS more money than we needed to. Far from being a windfall, our tax refund is money we rightfully earned.

Your refund may seem like a gift, but it’s actually not.

Receiving a tax refund means that you’ve essentially given the government an interest free loan, and most of us do this every single year. In fact, more than 3 out of 4 tax filers receives a refund, with the average refund reaching nearly $3000.

A Simple Fix

Don’t want to lend the government money interest free? There’s a simple fix. Go to your company’s payroll or human resources department and adjust your withholdings on your W-4 form. This will ensure that less money is taken out of each paycheck for taxes. You’ll get more in your paycheck each week, instead of receiving a large IRS refund at the end of the year. As a result, the government will not receive its interest free loan from you.

There are a few caveats. If certain things change during the year, – like divorce, marriage, job-change, etc. – they could affect your tax liability, causing you to even owe money in taxes at the end of the year.

Furthermore, changing your W-4 withholding may not work if a large percentage of your refund is due to the Earned Income Tax Credit.

More importantly, consider this: Is giving the government an interest free loan such a bad thing if it forces us to save money, something most of us are terrible at doing anyway?

We say we want to save. We want to do the right thing, but the sad fact is that too few of us do it! According to a GoBanking Rates survey, 69% of Americans have less than $1000 in savings. A Bankrate study revealed an equally sobering statistic. Sixty-six million Americans have no money in an emergency fund at all.

Automated Savings

Let’s admit it. Human willpower is weak. Sometimes the only way we save money is by being forced to save. Instead of looking at a tax refund as an interest free loan, consider it an automated savings program. Yes you could chose to get a bigger paycheck every week rather than a lump sum tax refund, but we humans have this insane ability to fritter away our money.

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But, but, but …. you’re giving the government free money in interest. Consider, a typical savings account earns you a measly 0.5% interest rate at best, meaning the typical “IRS loan” of about $3000 would net you a whopping $15 if placed in a savings account. This is a small price to pay for being enrolled in a automated savings program.

The only thing you have to be careful of, is putting your newly earned savings to good use.

READ: 5 Super Smart Things to Do with Your Refund Check

BMWK, what do you think? Do you have a problem giving the government an interest free loan?

About the author

Alonzo Peters wrote 281 articles on this blog.

Alonzo Peters is founder of MochaMoney.com, a personal finance website dedicated to helping Black America achieve financial independence.

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A Lifeline that Could Eliminate Your Crippling Student Loan Debt – PSLF

BY: - 17 Apr '17 | Money

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In October 2017 tens of thousands of Americans will see the remaining balance of their student loans completely erased. These people are among the first enrollees in the Public Service Loan Forgiveness (PSLF) Program.

The Good

Created in 2007, the Public Service Loan Forgiveness Program is designed to help people who choose to work in public service jobs deal with their crushing student loan debts.

The idea is relatively straightforward. People working in public service jobs pay a percentage of their income toward their Federal Direct Loans in 120 consecutive payments, spread out over ten years. Typically they are required to make a payment equal to one tenth of their discretionary income. After 120 payments, the rest of their student loan debt is forgiven. As an additional bonus, because the portion of the student loan that is forgiven is not considered income, it is not taxable.

The US Department of Education defines public service employment as: work within a government organization at the local, state, or federal level; work at a not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, or work at certain not-for-profit organizations that provide “qualifying public services”.

While loans that are received under the William D. Ford Federal Direct Loan Program, qualify for the PSLF program, other federal student loans may also qualify if they are consolidated into a Direct Consolidation Loan.

The PSLF program is a lucrative lifeline for people with crippling debt loads who decide to work in public service jobs. As a result, nearly 550,000 people have signed up for the program including civil servants, teachers, policemen, firefighters, and even doctors and lawyers who work for federal or non-profit entities.

The Bad

Unfortunately, relatively few people have taken advantage of the PSLF program. While less than a million people are enrolled in the program, the Government Accountability Office estimates that 25% of the workforce is employed in a job that would qualify for the PSLF program.

A report by the Jobs With Justice Education Fund suggests that just 1% of potentially eligible borrowers are enrolled in the program. The cause may be limited promotion of the program by the Department of Education as well as a complicated enrollment process. Worst yet, the report indicates that many loan service companies fail to even inform borrowers of their potential eligibility for the program.

You may qualify for this program and not even know it. To find out if you qualify for the PSLF program, visit the US Department of Education website.

The Ugly

Unfortunately, some people who believed they were working in public service jobs, and thus eligible for the PSLF program, were told years later that they were not actually eligible. These people had relied on approval letters from the program’s administrator, FedLoan, that their jobs had qualified them for the program.

One such person was lawyer Jamie Rudert. He was deemed eligible for the PSLF program because he worked for the Vietnam Veterans of America. After three years of working with the organization, however, the Department of Education declared that his work did not in fact qualify as public service, even though he was originally informed otherwise.

As reported by the New York Times:

“In a legal filing submitted last week, the Education Department suggested that borrowers could not rely on the program’s administrator to say accurately whether they qualify for debt forgiveness. The thousands of approval letters that have been sent by the administrator, FedLoan Servicing, are not binding and can be rescinded at any time, the agency said.”

In essence, the Education Department is claiming that you can not trust the word of the loan servicing company hired by the government to service federal student loans. This in essence has left hundreds of thousands of borrowers in limbo. Could their eligibility in the program also be retroactively revoked?

Just as concerning, some conservative lawmakers could push to eliminate the PSLF program altogether, although current program enrollees would likely be grandfathered with their benefits. One outlet has even called the PSLF program a “time bomb,” suggesting that the Trump administration kill the expensive budget item.

What Should You Do?

The PSLF program still remains one of the best ways to wipe out burdensome student loan debt. After ten years of working in a public service job and making payments based on your income, your debt should be eliminated. But as we’ve seen, the Education Department has reversed the approval of some applicants who were first deemed eligible for the program. Despite this fact, if you are currently already in a government or non-profit job, I would strongly suggest that you look into determining whether or not you qualify for the program.

If you do qualify it may be in your best interest to go ahead and apply for the PSLF program, but keep a close eye on whether or not the courts hold the Education Department and its program administrator, FedLoan, to initial program approval letters.

The tougher decision is for students who are not currently employed, but contemplating whether or not to go into careers in the government or public service based solely on their desire to take advantage of the PSLF program. There are no guarantees that Congress will not eliminate the program or that the Education Department will be allowed to continue to retroactively rescind a person’s acceptance into the program.

About the author

Alonzo Peters wrote 281 articles on this blog.

Alonzo Peters is founder of MochaMoney.com, a personal finance website dedicated to helping Black America achieve financial independence.

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