How the Tax Reform CAN Impact Your Student Loan DebtApril 9, 2018
Unless you were living under a rock as 2017 came to an end (and maybe you would have preferred it), you likely caught wind of the radical tax reforms proposed by the new administration.
When the tax law changes were first proposed, it raised some major concerns for student loan borrowers, and rightfully so. The originally proposed bill sought to eliminate 1) the ability for students to deduct student loan interest, up to $2,500, from their taxable income, 2) tax-free waivers for graduate students that could have raised their tax bill by 400%, 3) the Lifetime Learning Credit, 4) and the Public Student Loan Forgiveness Program (PSLF).
Thankfully, some fairly radical cuts to the issue of student loans were put on the shelf and education lawmakers will seek to PROSPER in Act II of our thrilling saga.
What Did Change?
Of course, the tax reform bill that WAS passed will most certainly affect other areas of your finances (which could indirectly impact your student loan debt). The bill did away with personal exemptions. For this reason, the IRS has released a new W-4 form, and if you haven’t yet discussed these adjustments with payroll, you might want to swing by after lunch.
The headline of the tax reform bill had a significant impact on corporate taxes, but we also saw a slight change in individual tax brackets and the interest rates associated with them, affecting nearly 80% of Americans. The standard tax deduction will nearly double, which could save you a couple hundred bucks on future tax returns (household incomes of $50K – $75K are expected to save an extra $870/per year).
How the Tax Reform CAN Impact Your Student Loan Debt
Now, hopefully, you didn’t stop reading after we mentioned the tax reform doesn’t have an immediate impact on student loans, because there’s an important side note here. These tax cuts for individuals have an expiration date of 2025. That gives you a seven-year window and a rare opportunity to take a substantial chunk out of your student loan debt principal without making a single change to your lifestyle. That’s like free money, except you work for it, let the government hold onto it for a while, then they give it back to you later… hopefully.
If you DO feel like making an extremely easy lifestyle change over lunch that will have a huge impact on your student loan debt, adjust your W-4 for a slightly higher withholding*. If you struggle with saving money, you can use this method as a sort of savings account to ensure a higher return next year. Whenever you get your substantially larger tax refund every year between now and the expiration date, apply it to your student loan principal.
Don’t think about it, just do it, and be explicit with your lender that you want those additional funds to go towards the principal of your debt. Many lenders have schemes to put extra payments towards your interest so they make more money and you are in debt longer.
Refinancing Student Loans and Capitalizing on the Tax Reform
If you really want to swing for the fence, look into refinancing your student loan debt with Education Loan Finance.
Student loan interest rates are already nearing historic lows, and the new tax cuts could mean even better rates for student borrowers. Refinancing also allows you to lock in your interest rates while they’re so low, as well as consolidate multiple loans into one, easy-to-remember monthly payment. With the recent tax breaks and a few simple adjustments, you can significantly lower student loan principal and save big in the long run. Our customers have reported that they are saving an average of $309 every month and should see an average of $20,936 in total savings after refinancing their student loans with Education Loan Finance.**
The truth is, the tax reformation is so new that we don’t yet know how it’s going to impact the federal rates which ultimately determine lenders rates. But if you keep an eye on the interest rates offered in the competitive student loan market, you could find yourself indirectly benefiting from the massive corporate tax cuts we saw at the end of last year.