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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.

Refinancing Student Loan Debt to Buy Your First Home

So, you’re ready to buy your first home? Look at you all grown up and wanting to be smart with your money. The truth is, you were smart enough to invest in your future by working hard for your degree(s), and now you want to double down and dig in some roots. But you may be wondering how you’re going to juggle both a mortgage AND a burdensome student loan payment every month. In fact, 41% of college grads with student loan debt hesitate to purchase a home because of the sizeable amount of student loan debt they have.

Purchasing your first home is a massive decision, and you’re wise to not take it lightly. But it doesn’t hurt to dream, right?

Picture yourself parking in the driveway of your first dream home. As you slowly walk up to the front door, everything has this wonderful soft glow and your peripherals are a bit cloudy because, well it’s a dream and that’s what they do in the movies. Anyways, you reach out for the door handle and are pleasantly surprised to find it has the perfect form, as if it were fitted for your hand alone.

You squeeze the latch, crack the door open and take the first step inside. It’s perfect. Everything is just as you imagined. You take another step towards the living room and brush against something with your foot. You look down to find a pile of old mail. “That’s strange,” you think to yourself. “This home doesn’t have any previous owners. This is MY dream home.” Perplexed, you shuffle through the stack and are horrified to find they’re all bills…. And they’re all addressed to you.

An eerie feeling crawls up your spine about the same time you hear a chilling voice say, “Stuuuudent Loooaaans.” The front door slams behind you, presumably by the Ghost of Student Loan Future. To your dismay, the living room begins to shrink and warp into a strangely familiar studio apartment. It’s at this moment you realize your dream has just become a nightmare and you have descended to the basement of Homeowner’s Purgatory, known as, “Oh Yeah, I Have Enough Student Loan Debt to Buy a Mid-Sized House. Maybe One Day I’ll Be Able to Afford It. Maybe.”

Fortunately, this is only a dream, and a fake one at that. More relieving, perhaps, is that this blog was not written to encourage or discourage you from purchasing a home; chances are you’ve already made up your mind on that. Besides, there are plenty of other blogs out there that can take you down that rabbit hole. What we’d like to do is help you understand how your student loan debt can and will affect your eligibility for homeownership, as well as ways to improve your chances of approval.

Graduated Savings Plan

First and foremost, paying off student loan debt and purchasing a home are not linear. With a graduated savings plan, you can pay down your debt and save for a home at the same time. Start out by putting the majority of your discretionary income towards your debt and set aside 10% for down-payment savings. Next year, decrease your student loan payments to 75% and increase your savings to 25%. The following year, aim for a 50/50 split and continue the trend until you’ve paid off your student loan debt and can finally allocate 100% of your discretionary income towards your down payment.

Lower Your Monthly Payment

Before approving your mortgage, lenders are going to be looking closely at how much other debt you owe. Your student loan debt will likely be the heaviest hitter on that roster. They will also take into account car loans, financed furniture, etc. Your best chance for approval is to aim for a debt-to-income ratio of about 25%. Technically the cut-off is at 43%, but you’ll likely borrow at a much higher interest rate and require you to have mortgage insurance. That’s going to really ramp up your monthly payments. While your overall debt-to-income ratio will certainly play a role in your eligibility, it may surprise you to learn that mortgage lenders are not so much concerned with the overall balance as they are with your monthly payments going towards the debt.

One of the best things you can do to get your financial house in order is to lower your monthly student loan payments by refinancing. While this will not remove the reality of student loan debt, consolidating your multiple student loans into one loan will eliminate the hassle of keeping track on your slew of different rates and terms. You can lower your monthly payment even more by extending the repayment term of your loan by few years, though this will affect the total amount of interest you end up.

Lock-In Your Rates

Over the past several years, variable interest rate loans have hovered around historical lows. However, you may have noticed that the prime rate has been on the rise, and this will surely affect anyone with variable rate loans. When you consolidate loans, you have the opportunity to lock-in a fixed interest rate for all of your student loan debt, eliminating any variable rates that could prove problematic when the economy improves and interest rates follow suit. Locked-in rates mean locked-in payment, and it’s comforting to know exactly how much you’ll owe every month for the rest of your loan term (the bank will like it too). If you are even thinking about refinancing as a way to get one step closer to purchasing your first home, now is the time to take advantage of your good credit score and get the lowest rates you can qualify for in the event they continue to rise.

Opening Doors to a New Life

In the end, purchasing your first home while simultaneously paying down student loan debt is more than simply crunching the numbers. Keep in mind that homeownership is far more than a mortgage payment. It’s also furniture and renovations, not to mention general upkeep, which tends to average more than one percent of the total cost of the home per year. You need to weigh very real costs against your invaluable personal happiness – both present and future. As no one can help you with this formula, it’s best to follow your gut.

Remember, your student loan debt and your first home purchase are both investments. Get creative with this abstract equation by having a roommate or utilizing online vacation rental websites, as either option may cover the majority of your mortgage. If you buy in the right neighborhood, you might even earn a couple hundred bucks, which, being the smart and financially responsible adult you are, will go directly towards paying down your student loan debt. It’s a great way to have your cake and eat it too until the day comes when you can reach out and cut a little slice of heaven out of that pie in the sky.

All that being said, take a serious look at refinancing student debt. If you are able to get in on a home purchase more quickly by reducing student loan payments now, you may also enjoy a lower rate on your mortgage loan. ‘A dollar saved is a dollar earned’, especially when it comes to student loan debt. Find out home much you can save here.