by Repayable | Feb 26, 2018 | Mindset, Money Matters
Read this if you’ve heard “student loans are good for your taxes” a time or two. Estimated read time ~3 minutes.
What is the student loan tax benefit everyone is talking about?
In short if you meet certain income requirements you can reduce your taxable income (and therefore your taxes) by subtracting the amount of interest you paid on your student loans.
How much interest can a borrower deduct?
Borrowers can deduct up to $2,500 from their taxable income if they fall below certain income limits.
What are the income limits for the student loan interest deduction?
This deduction starts to phase out once you make over $65,000 if you file as single and you can’t take the student loan interest deduction at all if you make more than $80,000 annually. If you make more than $165,000 as a couple filing jointly you can’t take this deduction at all but it starts to phase out at $135,000.
If you’re married filing separately you’re not eligible for the student loan interest deduction.
What is the most money I can save with the student loan interest tax deduction?
The most money a borrower can save by claiming the student loan interest tax deduction is $625.
Here’s how you can quickly estimate your savings: Student loan interest paid (max of 2,500) X % tax in your tax bracket
For this example that was $2,500 X 0.25 = $625
The tax deduction decreases once you’re over $65,000 as an individual or $135,000 as a couple but I’m not able to find a clear estimate of how that deduction phases out and changes. Essentially your maximum deduction happens when you make from $38,000- $65,000 per year (that means you fall into the 25% tax bracket) and you pay the maximum of $2,500 in interest.
How do I claim the student loan interest tax deduction?
Claiming the student loan interest tax deduction is pretty simple. You simple find your 1098-E form from your lender. Typically these forms are located in a “documents” type section of your online account or it gets emailed, or snail mailed to you. Then you plug your number into the indicated box on your tax form.
Like this:
Like Loading...
by Repayable | Feb 25, 2018 | Ask Jeni, Loan Forgiveness, Refinancing
Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.
My household income is about $230,000. I have $50,000 in student loan debt and my wife has $20,000. Would my wife be a good candidate for student loan forgiveness? She makes about $25,000 per year. Are there any options for my debt? We both have federal loans.
Let’s start out by looking at student loan forgiveness for your wife. By herself, your wife is an excellent candidate for income-driven student loan forgiveness. That means she would make payments under an income-driven plan for 20-25 years and the remaining balance would be forgiven.
However, how you file your taxes will determine whether only her income is considered or if your total household income is considered. If you file as “married filing jointly” your household income will be considered when determining the income-driven monthly payment. If you file as “married filing separately” then her income alone will be considered. Married filing separately doesn’t qualify for the same tax incentives as “married filing jointly” so be sure to talk with a tax preparer or accountant about which option makes the most sense for your financial situation.
What about the options for your student loan debt? Given your income of $205,000 a year or so $50,000 in student loan debt should be very maneagable. It gives you a debt-to-income ratio of 0.25:1 which is excellent. Your ideal loan options will depend on your personal goals.
Without knowing the specifics of your financial situation I can’t know for certain but it’s unlikely you will have any loan balance to be forgiven after 20-25 years of income-driven payments. You can use the Repayment Estimator on the Federal Student Aid (FSA) website to see how much interest you pay under different repayment plans and how long your repayment term is.
If you’re looking to get out of debt quickly you may be a good candidate for student loan refinancing. I don’t know about other debts such as a mortgage, car, etc but your student loan debt-to-income ratio is excellent and you have high personal income. If you also have an excellent credit score you have a lot of the characteristics refinancing companies are looking for.
Refinancing is a good option if your current interest rate is high and you can significantly lower it. For example I refinanced my federal loans from their 6.67% interest rate to a fixed rate of 3.37% this move will save me nearly $20,000 over the life of my loans. When you refinance your student loans your loans become private loans and lose their federal student loan benefits.
I’ve written a lot about refinancing so check out these posts if you’re considering it:
How to Choose the Student Loan Benefits You Need
Is Refinancing Right for You?
How to Find the Best Refinancing Rates Fast
A higher monthly payment will also help you pay less interest. If you have flexibility in your household budget you can make extra monthly payments, making sure to instruct your loan servicer to direct them to principal. You can also choose a more aggressive repayment plan so your required monthly payment will be higher. If you want to get out of debt fast, paying aggressively on your student loans will minimize the interest you’ll pay and save you money.
Like this:
Like Loading...
by Repayable | Feb 19, 2018 | Loan Forgiveness, Refinancing
Read this if you want to be able to spot a student loan scam from a mile away. Estimated read time 5 min.
The FTC estimates that repayers have lost over $95 million to student loan scams. Scam student loan companies trick people into thinking they can provide the student loan debt relief the repayer so desperately desires. Then the fraudster walks away with the money and giving borrowers nothing in return.
Student loan scams are modeled after real & legitimate student loan options. So today’s post is going to highlight four popular types of scams along with the legitimate options so you can avoid student loan scams.
Student loan forgiveness scams
These scams promise to get your loans cancelled or forgiven if you pay the company a fee. There are two important things to know to keep you away from this one. #1 There’s no loan forgiveness for private loans. #2 Federal student loans can only be cancelled in very specific situations (death, permanent disability, and school closing). All other loan forgiveness options take time and have no fees associated with them whatsoever.
What you should do instead:
Apply for federal loan forgiveness directly online the applications for these can be completed on the federal student aid website for free! You can learn about different types of forgiveness in this post (link loan forgiveness post)
Lower your monthly payment scam
This scam promises to negotiate with your loan servicer or lender on your behalf to get your monthly payments lowered. Some of these scams and steal your information and money and give you nothing. Some companies are ripping you off at best. Basically these companies offer to take your money and work with the loan servicer to negotiate a reduced payment amount. The thing is your loan servicer doesn’t have to do anything different and often they don’t. Meanwhile, the company you’re paying will take your money but not make your monthly student loan payments, putting you into default.
What you should do instead:
Contact your loan servicer directly. Applications for federal income-based repayment plans are free and can be easily completed online. Your payments can be as low as $0 per month.
Refinancing/Consolidation scams
These scams promise to consolidate your student loans to a lower interest rate. Refinancing and consolidation are both legitimate options but unfortunately there are also scam companies that have cropped up. You should never pay any type of fee for refinancing or consolidating your loans. There are no processing fees, application fees, or any other kind of fee. This process is free. If there’s a fee, it’s a scam.
What you should do instead
If you want to consolidate your federal student loans you can complete the free application here. If you want to refinance your student loans check out this post on the best refinancing companies. All the companies listed are legitimate refinancing companies.
Get your student loans out of default scams
This scam promises that if you pay them some amount of money (typically a few hundred dollars) they will get your student loans back in good standing. Most of these companies will just take your money and run. They don’t do anything to get your loans out of default.
What you should do instead:
Call your loan servicer and work to rehabilitate or consolidate your federal loans. Loan rehabilitation and consolidation are free and don’t require an upfront payment. A new monthly payment will be set up and you must make these payments on time to get your loan back in good standing.
Resources
Avoiding Student Loan Scams (Federal Student Aid)
Department of Ed’s Trusted Collections Agencies
Department of Education Default Resolution Services 1-800-621-3115
Like this:
Like Loading...
by Repayable | Feb 12, 2018 | Ask Jeni
Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.
I work for a non-profit, making me eligible for student loan forgiveness after 10 years. Since the employer [student loan] contribution goes towards my principal, how can this benefit me if my loans are going to be forgiven?
The biggest way your employer contribution helps you out in this situation is that it acts as a back-up plan. Because the benefit continues to lower your student loan principal you’ll end up with a lower balance if you become ineligible for Public Service Loan Forgiveness (PSLF). You’ll also have a lower loan balance if PSLF is eliminated by a Congressional budget vote.
One common way borrowers become ineligible for PSLF is by dropping below full-time. Full-time is as defined by the employer or 30 hours per week, whichever is more.
Failing to submit the necessary income information required to renew your income-drive repayment plan on time doesn’t technically make a borrower ineligible but it can mean you’ll pay a higher monthly amount (on the 10 year standard repayment plan) until you renew it. Failing to renew your income-driven plan can also lead to making ineligible payments on a 30 year standard repayment plan or other non-qualified plan. Key point here is to submit your income information on time to renew your income-driven repayment plan.
The final way a borrower can become ineligible is by switching jobs and working in non public service work. Although if that scenario applied you may no longer be getting the student loan repayment benefit.
If we look at the common good, this will benefit your fellow borrowers. There will be more PSLF funding available for borrowers like you who are counting on loan forgiveness because the employer contribution will decrease the final balance of your loan that gets forgiven after 120 eligible payments.
What your employer contribution won’t do.
Your employer contribution won’t make you eligible for PSLF any faster. You can only make one eligible student loan payment each month. That means the 120 payments required to receive PSLF can’t be reached any faster than 10 years. The extra monthly payments made by your employer are just extra payments that don’t speed up your duration of repayment until forgiveness.
Like this:
Like Loading...
by Repayable | Feb 12, 2018 | Money Matters
Read this if you want to know for yourself whether it’s smarter to invest your extra money or pay down your student loans each month. Estimated read time 7 min.
What’s the dilemma?
Investing, it’s a long term fiscally wise thing to do. Over time investments provide a rate of return around 6-7%. For the sake of our discussion we’re going settle on 7%. That means you can get a rate of return at least the same as all available federal student loan interest rates (7% is the Direct PLUS interest rate and is the highest federal interest rate). This rate of return compounds on itself year after year and will continue to grow even if you stop making contributions.
The best investors have enough money invested to live off the compounding interest, and continue to invest dividends indefinitely. Yep that’s right you can invest enough money that you can withdraw money each month without actually losing anything from your originally invested amount.
Indefinite compounding interest sounds awesome and all but what are borrowers to do when we have mountains of student loan debt holding us back from financial freedom?
How can we pay for our current existence without robbing our future?
Today’s post highlights the results of an objective calculation that identifies the repayment strategy leading to the most growth in net worth. Spoiler Alert it’s not what common wisdom would suggest.
Assumptions.
First we’re going to discuss the assumptions that today’s formula makes. Market rates of return are variable and perform better or worse depending on the year. This formula assumes a 7% constant rate of return from the market which reflects average market performance. Recognizing some years may have stronger performance like in 2017 when I got a 13.5% rate of return from my 401K or 2015 when I had -0.57% rate of return.
This borrower is able to contribute enough money to get the full match from their employer-sponsored retirement plan no matter what repayment strategy they choose. This example is not about choosing to invest or pay down debt exclusively. It’s about deciding how extra monthly income on top of usual debt repayment and investing performs when used to pay down debt or invest.
Another important assumption made is that once you pay off your student loan debt you invest all the money you were spending to repay that debt. If you pay off your debt and funnel that money to anything other than investing this formula doesn’t hold up.
A $19,000 loss from investing.
Common wisdom goes like this. If your student loan interest rate is lower than the rate of return you expect to get from the market invest your extra income instead of making extra payments on your debt. Well here’s the thing, that math doesn’t add up. Seriously. Common wisdom is flawed. Let me lay out the scenario for you.
Sallie Jones has $100,000 of student loan debt and makes $100,000 per year. Her current student loans have an average interest rate of 6.2%. Even under the most aggressive repayment strategy she can afford to contribute $5,000 per year to her employer-sponsored 401K which earns her a $4,000 match. The market rate of return is 7% and for the sake of simplicity it compounds monthly.
Let’s compare an aggressive 5 year repayment strategy, a 10 year repayment strategy, and an income-based repayment strategy that takes 11.36 years. Each strategy assumes that she invests the money she would have been paying toward her debt.
The 5 year repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $327,103
The 10 year repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $312,924
The income-based repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $308,601
Despite the fact the student loan interest rate in this example was less than the market rate of return,
the borrower who invested the money created by a less stringent repayment plan had a net worth $19,000 less than the most aggressive repayer after 11.36 years.
Key takeaways.
-There is no “one size fits all” strategy for debt repayment or investing. You need to customize your repayment and investing strategy to your personal financial goals and specific debt and income situation.
-Choosing to follow common wisdom instead of exploring your options can cost you tens of thousands of dollars.
-This formula doesn’t take into account your non-financial goals and your attitude toward debt and investing. If you make the calculation and find one strategy has the slight edge on the other but you don’t want to take that strategy then don’t. This isn’t about getting everyone to conform to a certain standard, it’s about making sure everyone has the best information available to make decisions.
Will your net worth grow more if you invest more or repay your debt faster?
I designed a simple workbook that walks you through this exact calculation. In less than 10 minutes you can have a set of numbers to guide your decision-making. You can get Repayable’s Custom Guide to Investing Extra vs Repaying Aggressively.
Don’t be overwhelmed, it may seem daunting but it’s a lot of plug and play where you use your actual financial information in an online calculator rather than crunching the numbers yourself. End the debate about where to put your extra monthly income. The guide is available for download here it only requires your email address.
Like this:
Like Loading...
Recent Comments