SLRP quirks

The Army's Student Loan Repayment Program is great, but there are a number of limitations to it. For one, it doesn't pay back private loans -- only federal loans like Stafford, Perkins, etc. (Here's the full list.) Those with private loans are just plain out of luck.

Second, it only goes to outstanding principal. It does not go to interest, nor does it pay anyone for past principal payments. That means that people like me (who joined the Army nine years after I graduated college)don't get reimbursed for the principal they've already paid off.

Third, you have to remind them to pay you. My active service anniversary is in June, so I expected my payment to come at about that time. Unfortunately, they only *authorize* the payment at the end of your year of service. This year, I only got paid after I sent them an email. I just got my payment today.

Last, and this is where it gets interesting, there's now 25% withholding for federal taxes.

In my situation, I came into the Army with over $50,000 in federal student loans from my Bachelor's and Master's degrees, so it made sense to take the student loan repayment option rather than the Montgomery G.I. Bill. This entitled me to three annual student loan payments of about $17,000.

Last year, things worked out well because -- for some reason -- nothing was withheld from my loan repayment. One hundred percent of it went to paying down my principal. Though it meant I had a smaller tax refund at the end of the year, I wasn't concened -- at least I didn't have to pay anything.

This year it worked out differently, I guess because somebody must have complained about big end-of-year tax bills. As it turns out, the old way wasn't in line with federal payroll rules -- they're required to withhold 25% for taxes. As a result, I'll have to wait until I file my taxes before I can see the remaining $4000 or so of this year's student loan repayment.

There are pros and cons to this, of course.

If I get that money back in the form of a tax refund, I definitely not going to pay down my subsidized (and therefore 0% interest) student loan -- I'm going to pay down something with a higher interest rate (like my car) or put it into the Army's Savings Deposit Program (10% return), since I'll be deployed by the time I get it.

So despite the intention that student loan repayment money go directly to the lender, it ends up in the borrower's hands. Doesn't that seems strange?

Then there's the issue of interest. Let's say a person joins the Army soon after the beginning of the year. This person receives his annual repayment one year after his active service date, but they essentially have to wait another year to receive what was withheld for taxes.

This can be an issue if that guy has a significant portion of unsubsidized Stafford loans to repay. For every $5,000 (at 7%) that doesn't get repaid, they have to pay $350 in interest over the course of the year. By comparison, someone who joins the Army late in the year gets that withholding much sooner.

That seems a bit unfair. Both "earn" their payments after a full year of military service, but one has to wait another year to "get" the remaining quarter.

I understand it's a matter of federal law to withhold a portion for
taxes, but it seems lame that you can fulfill your commitment and yet still end up with student loans to repay at the end of it all. I'm just glad because 1.) it looks like I'll be getting every bit that was withheld, and 2.) next year's payment is subject to the combat zone tax exclusion.