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Using Your Tax Return to Tackle Your Student Loan Debt

Let’s be honest, the only remotely fun part of taxes is playing the guessing game on how many greenbacks Uncle Sam is going to mail you this spring. There are about a million and one ways to spend your return, and no one can tell you which is best. It’s your money; use it how you need it, eh Mr. Wentworth? But before you blow it on pinwheels, paddle ball, and a couple cases of light beer, let’s first make sure you’re getting the maximum return. The government is very much in favor of you increasing your knowledge for the purpose of earning (cough, cough… spending) more money in the future.  As such, they offer a variety of tax breaks that can be applied in certain situations of your student debt. Surprisingly, only 30% of student loan debtors take advantage of Uncle Sam’s tax breaks each year. You may not be eligible for all of them, but it certainly doesn’t hurt to know your options.


Tax Deduction Vs. Credit

Just to clarify, deductions reduce your taxable income, while tax credits reduce the amount you owe in taxes. Unfortunately, you’re only eligible for tax credits if you’re still enrolled in school, which is why it’s often utilized by parents who are currently helping fund their child’s education. If you missed the boat on tax credits, keep it in the back of your mind for twenty years or so. It’ll come in handy when your kids are looking into undergrad programs.


If you’ve already graduated and are starting to repay your student loans, the government offers a Student Loan Interest Deduction that will reimburse you for a portion of the interest payments you make – up to $2,500 per year deducted from your taxable income. If you find yourself in the 25% tax bracket, that’s up to $625 back in your pocket every year. Better yet, that’s $625 towards the principal of your student loan debt… more on that in a moment. As long as you make less than $80,000 per year, you could be eligible for at least some part of this benefit. The amount of savings is completely determined by the amount of interest you paid last year, so be on the lookout for a letter from your lender and be sure to report that amount along with your taxes.


Proper Withholding

Part of financial responsibility is being intentional with your money. You should be aware that you can have some control over how much refund you get at tax time. Talk to your employer and revisit your W-4. Pull up your last couple of tax refunds and adjust this year’s withholdings according to your present financial situation and aspirations. If you seem to spend every dime of your take-home pay then ask to withhold more each pay period and Uncle Sam will hold that money for you. Then he’ll give you a larger refund from your tax return. Withhold less and you take home more money each month, but your tax refund will be smaller or nonexistent. Just be sure to invest that money toward your future and not on instant gratification. You’re a hard worker and you’re smart; you wouldn’t be where you are if you weren’t both of those things. Just make sure you apply those same characteristics to your money.


Maximize your return by investing in yourself

You’re a hard worker and you’re smart; you wouldn’t be where you are if you weren’t both of those things. Just make sure you apply those same characteristics to your money.


That being said, take the full refund and apply it to whichever debt has the highest rates, be it student loans or credit card debt. Oftentimes, student loans have the lowest interest rates, so if you’re quasi-drowning in credit card debt, you can stretch your dollar by paying down that credit card principal first. That way you can minimize the number of those hard-earned greenbacks that go towards paying someone else to allow you to borrow money from them.


If you have manageable credit card debt and are looking for ways to excavate your sizeable student loan debt, your tax refund could come in like a wrecking ball (Lord knows we can’t count on Miley Cyrus). NOTE: any time you want to make extra payments towards your student loans, it’s imperative that you explicitly instruct your lenders to put that money towards the principal of the loan. Many less-than-reputable lenders have crafty fine print that will put that money towards the interest, essentially tearing your dollar in half.


We know it can be tempting to spend your refund on something more fun than paying down debt, so perhaps there’s a healthy compromise to both treat yourself to a shopping spree and simultaneously treat yourself to less debt. Whatever you do, don’t confuse your tax return with your holiday bonus check. That’s your money that you already worked for; you were just graciously allowing Uncle Sam to hold onto for a few months and now he is RETURNING it to you.


Refinance Your Student Loan Debt with Education Loan Finance

If you want to put a serious dent in your student loan debt, consider refinancing for a lower interest rate. Borrowers who refinance with a reputable lender like Education Loan Finance. Customers have reported that they are saving an average of $309 every month and an average of $20,936 in total savings after refinancing their student loans with Education Loan Finance.* It may be difficult to imagine a life without student loan debt, but with a bit of discipline and a little help from Uncle Sam, you just might get some pep in your step for your walk to the land of the financially free. Calculate your savings here.


See How the Tax Reform Could Impact Your Student Loan Debt


*Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

Education Loan Finance cannot give tax advice and readers should consult a tax advisor about their specific circumstances.