Loan question (student)

[Seeker]

Through reasons we won't go into I am responsible for my son's student loan (in the US). He has been paying it but only the minimum amount so the $20k loan is now $50k. Payments have been frozen by the US government as a covid relief but that finishes at the end of next month (although rumours abound that something else may be coming to help).

I want to help him but I can only (only!!!) give him $16k/yr or I get stung for US tax. So which makes more sense - pay $16k off the capital in one chunk or increase the monthly payments by $1300 ish (current minimum is $399/mo) to make it $1700/mo or does it end up the same?
It's a 7% loan and has 19 years to run (I think).

You can tell by my recent bike trades that I'm not good with money.

[Craig380]

Does the loan have a finite span like UK student loans? Martin Lewis used to advise UK students to NOT pay off their loans, and only do the minimum repayments because the government wrote the loans off after 30 years.

[Seeker]

Originally Posted by Craig380

Does the loan have a finite span like UK student loans?

No, this is America. If you're employed in public service they occasionally end the loan. Teaching in certain areas, permanent disability and death are about the only ways.

Alexandria Ocasio-Cortez (AOC) a left leaning Democrat was advocating complete loan forgiveness but that's over $1.6 trillion (not billion) so that's not going to happen, the Republicans were passing out at the thought. They may knock off $10k but even then the Repubs are frothing at the mouth.

Biden/White House are supposed to be announcing something to help before August.

I doubt whether I can beat inflation with my savings so I may as well help pay off the loan.

I use "Wise" to transfer money to the US but it's unclear whether I can pay the Federal loan provider from the UK or whether I pay my son and he pays.

I just don't know whether paying off a chunk of the capital and then only making minimum payments is better or worse than paying the same lump sum amount (divided by 12) on top of the minimum over the year. If that makes sense.

(I should add that this loan was for his degree which he got only he now doesn't want to work in that field)

[Craig380]

If the loan's at 7% then the amount owed is growing faster than anything you can get in savings, so I'd say it's definitely worth paying chunks off the capital as and when you can, rather than simply increasing the monthly repayments.

Both will accelerate paying off the loan, but paying a lump sum is more effective because if you pay off $16K in one go, on the next month the loan is only accruing interest on the remaining $34K.

In contrast, if you increase monthly repayments up to $1.7K, on the next month the loan is accruing interest on the remaining $48,300. So the total repayment amount will be lower with the lump sum.

[Seeker]

Originally Posted by Craig380

If the loan's at 7% then the amount owed is growing faster than anything you can get in savings, so I'd say it's definitely worth paying chunks off the capital as and when you can, rather than simply increasing the monthly repayments.

Both will accelerate paying off the loan, but paying a lump sum is more effective because if you pay off $16K in one go, on the next month the loan is only accruing interest on the remaining $34K.

In contrast, if you increase monthly repayments up to $1.7K, on the next month the loan is accruing interest on the remaining $48,300. So the total repayment amount will be lower with the lump sum.

That makes sense, thanks.

[Biker Biggles]

What happens if you stop paying it or if you reach retirement age and cant afford it?

[Seeker]

Originally Posted by Biker Biggles

What happens if you stop paying it or if you reach retirement age and cant afford it?

I think they come for a body part.

When I moved to the US in '89 I was surprised by how easy it was and how many declared bankruptcy. Unfortunately you cannot declare bankruptcy for a student loan and so the pressure in the system is building.

I find it weird that a country's future is built upon its young, the brighter the better. Yet we effectively tax them to dissuade higher education.

The US situation (and here too, perhaps) is that people were encouraged to get a degree with a view that the high paid job that that would yield would allow them to pay off their student loan (s). Then the high paying jobs disappeared. Financial crash/covid/corporations relocating to China.

When I left the US in 2013 the fear was that the US student loan debt was going to cause the next financial crash. Hasn't happened yet but the debt is out of control - the average student loan debt is between $34k and $44k (with a total of $1.6 to $1.7 trillion).

[Red ones]

My understanding is even death doesn't stop them from claiming the payment.
As for the period of the loan, again my understanding is that you have to pay - the loan gets written off, but then that is seen as a benefit and, therefore, is taxable - yes, you pay tax on the value of the written-off loan (tax timebomb).

The significant difference with UK Student loan is that it genuinely gets written off after the loan period (without being taxed)