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Should I Pay My Student Loans or Back Taxes First?

Student loans can be quite overwhelming, but the worst kind of debt to overlook is back taxes. One thing about the IRS that you should always know is that the IRS always gets its money. Regardless of the number of people you owe, always prioritize back taxes. Ideally, the IRS is the only creditor that can impose fines or send you to prison for failure to pay. In fact, if you owe many creditors money, the IRS will undoubtedly be the first in line to collect your assets to help satisfy its claims by imposing tax liens. Here are reasons why you should consider settling your back taxes before your student loan.

Summary

Student loans can be quite overwhelming, but the worst kind of debt to overlook is back taxes.

Student loans are a type of unsecured debt, which means there is no collateral tied to the debt, like a car loan or a mortgage. If you fail to make your payments, the lender or creditor cannot automatically repossess anything of yours to clear the debt.

Ability to Cancel the Debt

One of the most significant differences between tax liens and student loans is the relative ease of having the debt canceled because of bankruptcy. You can have your student loan debt removed or canceled in bankruptcy. To do this, you need to prove that settling the debt would make you live lower than the minimum living standards. Moreover, some student loans make you eligible for forgiveness programs that enable you to cancel part or all of the debt.

With back taxes, on the other hand, bankruptcy is not as easy as with student loans. In some cases, it can help you get rid of your debt. However, it is often a really long process with lots of rules, and most times, it doesn't work. This means that paying and filing your taxes should be a priority since, with student loans, you can have the loan canceled easily because of bankruptcy, unlike with back taxes.


Non-Payment Consequences

Student loans are a type of unsecured debt, which means there is no collateral tied to the debt, like a car loan or a mortgage. If you fail to make your payments, the lender or creditor cannot automatically repossess anything of yours to clear the debt. However, there is an exception to federal student loans where sometimes your federal tax refunds can be taken to remove your defaulted student loans. There is also a possibility that you will be sued, but the chances are really low.

On the other hand, with back taxes, the IRS can seize your assets, money, or put liens on your property. It is often a lot of hassle for the IRS to take your property, so most times, they seize only money. They do this through three common ways; wage levies, account receivable levies, and bank levies. With wage levies, the IRS takes part of your wages to settle your tax bill. Account receivable levies, the IRS takes all the money you earn as an independent contractor or small business owner. With bank levies, the IRS simply takes money from your bank account to pay your tax bill.

If you have back taxes, the IRS can also garnish your wages and levy your accounts, seizing all the taxes you owe them. If the taxes are still unpaid, your taxing authority can use a tax levy to take your assets legally to collect all the money it is owed. A lien secures the government's claims or interests in your business or the individual property, and a levy gives the government permission to seize and sell the property to settle your debt.

Moreover, if you have a debt of at least $51,000, the government will not allow you to get a passport or even renew one. In some cases, the IRS can transfer your account to private collection companies. As many people already know, dealing with collection companies is much more unpleasant than working directly with the government. It is clear that the consequences for not settling your back taxes are dire, unlike with student loans.

Repayment Flexibility

Student loan repayment options are the most flexible out of any other loans you might have. Most of the time, the lenders have many repayment plans that they can choose based on their payment ability. For instance, most lenders use an income-based repayment plan that fluctuates based on your expenses and income. Deferment and forbearance are also options if you enroll in school again or are unable to make your payments.

On the other hand, with taxes, the IRS can charge you a penalty for failing to pay. Ideally, the IRS will make you pay 0.5% of your unpaid taxes every month until when it's at 25%. During this time, interest also accumulates on your unpaid taxes. Since student loans have numerous repayment options than taxes, you should consider settling your taxes first.


What To Do If You Owe The IRS

After establishing that back taxes are more important to settle than student loans, you must be asking yourself how you can get rid of tax liens. Here are a few suggestions you should consider:

Set up an installment agreement with the IRS

You can set up IRS payment plans; these are called installment agreements. The agreement you get will depend on how soon you can settle the balance and how much you owe. If you can pay it within 120 days, then you should not set up the agreement. Setting up an agreement will help reduce your penalty by 0.25% of the unpaid balance per month until you fully clear the balance on schedule. If you do not pay on schedule, then the IRS can make your agreement void.

Apply for a hardship extension or an offer of compromise

The IRS provides options for people in hard situations. To get this extension, you have to prove that settling the tax would cause you financial hardship. This will buy you time as you try to find money to pay the debt.

On the other hand, an offer in compromise helps you settle your debts for an amount lower than what you owe. This is a legal option if you cannot pay your full tax liability, or settling the debt can cause you financial hardship.

Use a credit/debit

This option is available for various service providers. You can check with the IRS for a full list of service providers. Utilizing this mode of payment is very convenient and gives you flexibility and greater control for making payments. You can also earn miles, points, and other credit card rewards. However, high credit card balances can negatively affect your credit score.

In conclusion, it is quite clear that your priority should be the latter between student loans and clearing back taxes. You do not want to have to deal the consequences of not paying your taxes. Moreover, there are many options to help you navigate back taxes to help you not deal with the consequences.