A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. As college tuition costs rise every year, many people find themselves wondering how they will be able to pay off their loans,. Here are some common questions that come up when figuring out how student loans will affect your finances and what you can do to prepare yourself.
Are my student loan payments tax deductible?
The interest portion might be, thanks to the student loan interest deduction. The maximum deduction is $2,500 in 2023. You don’t need to itemize to claim this deduction.
To qualify, you must meet a couple requirements:
The student loan on which you’re paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students.
In addition, you must meet income limits. If your modified adjusted gross income (MAGI) is not more than $75,000, you can claim up to $2,500. The deduction amount is gradually reduced if your MAGI ranges from above $75,000 to less than $90,000. If your MAGI is $90,000 or more, you may not claim the deduction.
If you paid over $600 of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E from your lender, showing the total amount of interest you paid for the year. If not, contact your lender to request this information.
Can I refinance my student loan?
Generally, the standard repayment option for student loans involves a fixed monthly payment for a 5- to 10-year term. With increasing tuition costs, however, it’s possible you may graduate with student loan payments that are simply unaffordable. Moreover, if you have multiple student loans, you may be required to make several different monthly payments to different loan servicers. Consolidation of your loans may thus make your debt more manageable.
You can consolidate your federally subsidized student loans through a variety of programs. The process pays off your existing loans with a single new loan. Most consolidation programs offer a variety of repayment options. You can choose an extended payment option, a graduated payment option, or (in some cases) an income-sensitive repayment option.
An extended payment option allows the term for repayment to be as long as 30 years. Although this can dramatically lower your monthly payment, it can also dramatically increase the total cost of the loan. The interest rate may be higher, and interest charged on any unpaid principal will continue to accrue for a longer period of time. However, as with all consolidation programs, you can make prepayments against principal at any time without penalty.
A graduated payment option starts off with lower monthly payments that increase over the term of the loan. Theoretically, as your income increases, you are better able to afford the higher payments.
An income-sensitive repayment option ties your monthly payments to your income level. The higher your income, the higher the required payment. Conversely, if your income drops, the required monthly payments may be reduced. This option requires you to allow the lender access to your federal tax return information.
Of course, you are always free to explore other refinancing options, such as an equity loan or a loan against a retirement plan. However, you should explore carefully the advantages and disadvantages of these options before pursuing any one of them.
How will I ever pay off my student loans?
As the cost of post-secondary education continues to increase and you take on further student loan indebtedness to pay for it, you may feel as if you are leaving the ivory tower with a mortgage on your back. You may be surprised to discover that some or all of your indebtedness can be forgiven if you are employed in certain public-service sectors, teach in teacher-shortage areas, or go into the Peace Corps.
If these choices aren’t available to you, you must find a way to budget for your student loan payments. Review your household income and expenses. Can you reduce your spending on entertainment, luxuries, and discretionary items? If so, you can divert these saved funds toward monthly principal prepayment of your student loans, thus shortening the overall repayment term and saving on interest charges. You are always permitted to prepay the principal of student loans, partially or in full, without penalty.
Would consolidating your loans or refinancing your loans make the payment schedule easier? Check with your current lender to see what options you might have.
Are you in a position to take on a second, part-time job? The income from this job could be used to reduce your student loan indebtedness. Can you devote a tax refund, gift money, or inheritance to principal prepayment? Even infrequent payments of this sort will ultimately reduce your loan balance and save you both time (repaying the debt) and money (the interest on the debt).
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.