Exploring the Options for Student Loan Repayment
As we approach the end of summer, the joy of a new school year serves as a good reminder of a lingering responsibility of education: payment of student loans. Average student loan balances in the U.S. continue to increase, along with the struggle to repay them, which can last decades. Education loans can be a heavy financial burden on families, limiting the ability to purchase a house, enjoy vacations and small luxuries, afford children and childcare, save for children’s education, and save for retirement.
Financial advice to pay off student loans as soon as possible may be easier said than done, particularly where some families are spending up to 17% of their annual income on loan payments, according to a JP Morgan Chase study. How can one attack the burden of student loans while still providing for oneself and family, and making progress to financial stability? Know your options and available assistance.
The standard repayment period for student debt is ten years. Federal student loans can often be extended up to twenty-five years, with fixed or graduated payments that will increase every two years (along with the debtor’s income, hopefully). Income driven repayment may be an option for young graduates, with several choices available for federal student loan payments. Generally, income driven repayment caps the monthly loan payment at 10-20% of monthly discretionary income, for 20-25 years, forgiving any remaining balance after that time. However, it’s not a simple calculation, and there can be many traps for the unwary in income based repayment plans, particularly for those seeking public service loan forgiveness after 10 years of payment. Read the fine print closely, and seek confirmation from the loan servicer. Keep records of payments and confirmations.
With income driven repayment plans, the monthly payments may increase or decrease depending on income and family size changes. You will have to re-certify each year to recalculate the payment, even if there have been no changes. If you do not re-certify annually, any unpaid interest will be added to the principal of the loan, increasing the total cost of the loans. There are a number of options for income driven repayment; detailed research into your particular income and family situation will be needed to determine which option is best for you.
Private student loans are a different species altogether. Private loans often come with higher interest rates, cannot be canceled or forgiven, and carry no income based repayment option. Private loans usually have repayment periods between 5 and 20 years. Glum graduates have watched interest rates fall in the past several years, while they are stuck with higher rates on private loans. What’s a grad to do? Refinance. Personal loans can carry much lower current interest rates, and allow for consolidation of multiple loans into a single loan. Refinancing over a longer period may lower the payment to an affordable amount for current income levels, or allow for a shorter payoff period under a lower interest rate, potentially saving thousands of dollars in interest.
Tax benefits may help reduce the stress of student debt. A student loan interest deduction is available for qualified U.S. tax filers based on interest paid on post-secondary student loans. Up to $2500 in loan interest payments paid in a tax year may be deducted from taxable income. If you paid less than $2500 in interest, you can only deduct the amount paid. Phaseouts begin at $65,000 AGI for single filers and $135,000 AGI for married filing jointly, capping out the deduction entirely at $80,000 (single) and $165,000 (joint). In addition to the interest deduction, a number of education tax credits are available for expenses paid during a tax year. Consult your tax preparer or the IRS Interactive Tax Assistant to determine if you are eligible for the credits.
The State of Maine, in significant effort to keep Maine graduates living and working in Maine, has developed the Opportunity Maine Tax Credit. For Maine residents graduating in 2008 or later (2008-2015 degrees must be from a Maine school; for 2016 and later graduates, a bachelor’s degree from any accredited US school or a graduate degree from a Maine accredited school qualifies), a tax credit is available to offset Maine income tax. The credit is equal to student loan payments made, up to a benchmark payment amount promulgated by the State. For tax years 2013 and forward, the credit is refundable if the degree is in a STEM subject. For 2016 forward, the credit includes all associate degrees (some associate degrees from 2010-2015 are included). Unused portions of nonrefundable credits can be carried forward up to 10 years. Recent Maine graduates living and working in Maine should research the availability of the credit to potentially yield significant tax savings.
Employer Repayment Assistance
Some companies offer a generous employee benefit that pays student loans on behalf of employees, up to an amount set by the employer. Be aware, however, that employer student loan contributions will be considered taxable income to the employee, as opposed to tuition reimbursement benefits, which are tax-free. Maine employers can also claim the Maine Opportunity Tax Credit based on payments made directly to the lending institution on behalf of a qualified employee, but not for reimbursement made directly to the employee.
Get ‘er Done
At the end of the day, student loans likely have to be paid. If you find your loan payments are burdensome, and holding you back from financial stability and personal growth, there may be options and benefits to lift a little of the weight of loan debt. Any penny saved in alternative repayment options or tax savings should be put toward student debt, cutting the length of repayment and saving long term interest. The sooner those loans are paid, the sooner you can find your way to financial freedom, and enjoy the successes of that college degree.