Another school year will come to a close next month, and the graduating Class of 2017 will emerge into the real world. Many graduates will join the shocking number of Americans that already wrestle with outstanding student loans.
According to the Quarterly Report on Household Debt and Credit, released February 2017 by the Federal Reserve Bank of New York Center for Microeconomic Data, total outstanding student loans at the end of 2016 was at $1.31 trillion—an average of more than $30,000 per borrower.
The statistics are daunting, especially if you are one of the 44 million Americans that shoulder this burden. However, with an average income stream and a plan, you can work through your student debt swiftly and effectively.
Start Off on the Right Foot
Choose a repayment schedule with a monthly payment amount and a loan life term you are comfortable with. If you have a fixed rate loan, a lower monthly payment amount can result in a longer loan term which means a higher interest paid out over the life of the loan. For example, if you have a $30,000 loan at a fixed rate of 6.0% to be paid over 10 years, your monthly payment will be $333, and you will pay a total of $9,967 in interest over the life of the loan. However if you choose to pay that loan over 20 years, your monthly payment amount will be lower at $215, but you will pay $21,583 in interest over the course of the term.
If you have a variable interest rate loan, you will need to pay closer attention to each monthly payment. Although these loans tend to have lower interest rates at the onset, the rates may change and your monthly payment will consequently vary.
Choosing a monthly payment amount you can handle means defining a cash flow budget based on your actual or estimated monthly income and expenses. Once you’ve determined how to cover your loan payments as part of your needed expenses, resolve to stick to your plan.
Know What You Owe and When You Owe It
Keep track of your student loan balances and be knowledgeable about how your payments apply to the principal loan balance versus interest expense. If you have multiple student loans, you may have to stay on top of multiple loan terms with varying repayment schedules. Make a list of all of your outstanding loans, including important information like borrowed amount, interest, and loan institution.
Grace periods on a loan will impact when you must begin making payments. A grace period is a set amount of time after a student graduates, drops out of school, or drops to less than half-time student status, before student loan repayment is required. Many student loans have an established grace period to allow the borrower to find regular income to help pay off the loan. If you have a grace period, know that some loans accrue interest during the grace period and some do not. This can make a significant difference in how much it takes to pay off your total debt.
Student loan assistance is now one of the latest new employer benefits. In the 2015 American Student Assistance Survey, 76% of respondents said that student loan assistance would be a contributing factor when deciding to take a job. In an effort to attract and retain new talent, a number of employers now offer student loan assistance to full- and part-time employees. If you have a student loan it is definitely worth exploring what, if any, benefits your employer has related to student loan assistance.
Research Student Loan Forgiveness Programs
You may be eligible for student loan forgiveness based on your job, permanent disability, or the closure of your school. For example, if you are employed by certain not-for-profit or government organizations you may be eligible for student loan forgiveness under the Public Service Loan Forgiveness (PSLF) Program. You may also be eligible for student loan forgiveness if you are a teacher.
Be aware that there may be tax consequences when student loans are forgiven. Canceled student loans, including forgiven loans, are viewed as an elimination of debt obligation, and will sometimes result in taxable income. Some of student loan forgiveness programs result in tax-free forgiveness, but not all of them.
Once you have established yourself as a reliable borrower with steady income, you may be in a position to save a lot in interest or shorten the life of your loan by refinancing and/or consolidating multiple student loans. Shop around. Many companies are willing to offer better repayment plans for “dependable” student loan borrowers. You will need to have a respectable credit rating, or you may need to find a co-signer to help you get desirable loan terms. Keep in mind that refinancing will also result in loan origination fees. Make sure you can more than cover those fees with savings that result from the refinancing process to make the refinancing worth your while. If you don’t refinance, consider if you can pay more than the minimum principal payment to decrease your loan balance more quickly.
Tax Deduction for Student Loan Interest
For 2017, you can deduct up to $2,500 of student loan interest on your tax return, subject to income limits. This deduction starts to phase out at $65,000 ($135,000 if married filing jointly) modified adjusted gross income, and is fully phased out at $80,000 ($165,000 if married filing jointly) modified adjusted gross income. The money lent must be used to pay for qualified higher education expenses, and it must come from a qualified lending source.
There are a number of different strategies that you can use to work your way through the student loan repayment process. The important thing is to put a plan in place and to be disciplined about sticking to your plan. The sooner you get control of your student loans, the sooner you will be able to move on to the life as you meant to live it.
If you have any more questions about the student loan interest deduction or any other tax impacts as you execute your repayment strategy, let us know.