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Using Your Tax Return to Tackle Your Student Loan Debt

March 14, 2018

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.

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2019-09-16
What I Would Have Told Myself in College: Barbara Thomas

  Barbara Thomas, Executive Vice President of Education Loan Finance (ELFI) provides some financial advice to college students based on her own experiences in college.   Hello, I’m Barbara Thomas. For most, like me, my college days were a great experience that lead to incredible personal growth. I had a marvelous sense of freedom and made many new friends. However, I have spent much time reflecting on what I would do differently if I could begin my college life all over again, given what I know now. Hindsight is a wonderful thing, isn’t it? So here’s my advice to all of you who are preparing to enter college, or are currently in your freshman or sophomore years.

Choose an Affordable College

When looking for the right college, don’t get beguiled by a famous name and a beautiful campus. And, while a state-of-the-art fitness center or an Olympic-size swimming pool might be important if you’re an athlete, most of the time you will be paying for them in higher college fees. Instead, make sure to keep your eyes on finances, as affordability should be a top concern. Considering the fact that many students end up taking on sizeable student loan debt, keep in mind that you (most likely) won’t be living on that beautiful campus in your late 20s or 30s.

Rethink Your Path to the Best Education.

Just because a college is more expensive, doesn’t
necessarily mean that it’s better than one that costs less. You should look upon college as an investment in your future. Consider what the return on investment (ROI) from your college education will look like. In other words, analyze which college is likely to provide you with the most bang for your buck. Here’s a report from U.S. News & World Report that gives you the ROI of different colleges.

Look at Alternatives to a Four-Year College.

If you find out that college is not the best path for you, it can turn out to be an expensive mistake. Keep in mind that dropping out of college won’t make your student loans disappear. So before you enroll in a college, consider these alternatives:
  • Take a gap year to earn money to put toward going to college and give yourself more time to decide what you want to do.
  • Consider attending a trade school to learn a valuable skill with high earnings potential.
  • Spend two years at a community college. Attending a community college can help you save on tuition. However, if you plan to transfer to a college of your choice, be sure to do some checking. Find out how many transfer students are accepted and how many of your community college credits can be used.
Do your research and crunch the numbers to make sure you’re making the best choice.

Earn More While in School

A survey of millennials found that earning money while in college was the number one thing that participants wished they had done (or done more of). This reflects the increasing financial cost that goes along with obtaining a college degree. The College Board estimated that in 2017 (updated figures are available), the average student loan debt upon graduation was $28,500. Keep in mind that a heavy debt load is going to affect your financial future – your ability to buy a home, start a family, and save for retirement. Apart from financial considerations, there is no better way to acquire real job skills than to hold down a job and learn about its demands firsthand. Employers know this, which is why previous work experience is the most popular measure to assess job candidates, even those straight out of college.

Research Ways To Lower Your Monthly Student Loan Payments

So, you’ve done everything right - you chose the higher education path that was right for you, and you have landed an interesting job. Now, what about those student loan payments? Are they weighing you down and preventing you from leading the life that you had envisioned after college? ELFI has a solution to your problem – it’s called refinancing. You can close out your original loan and take out a new one with a lower interest rate and/or a longer term. This can significantly lower your monthly loan payments. Get in touch with us to see how we can help you!  

Learn More About Student Loan Refinancing With ELFI

  Terms and conditions apply. Subject to credit approval.
2019-08-03
How Does Student Loan Interest Work?

When you take out a student loan, you will not just be paying back the amount you borrowed – the lender will also charge you interest. The easiest way to think of interest is that it’s the cost paid by you to borrow money. Whether you take out a private student loan or a federal student loan, you will be charged interest on your loan until it is repaid in full. So, when you have finished paying off your loan, you will have paid back the original sum you borrowed (your original principal), plus you will have paid a percentage of the amount you owed (interest). Properly understanding the way that student loan interest affects your loan is imperative for you to be able to manage your debt effectively.  

The Promissory Note

When a student loan is issued, the borrower agrees to the terms of the loan by signing a document called a promissory note. These terms include:
  • Disbursement date: The date the funds are issued to you and interest begins to accrue.
  • Amount borrowed: The total dollar amount borrowed on the loan.
  • Interest rate: How much the loan will cost you.
  • How interest accrues: Interest may be charged on a daily or monthly basis.
  • First payment date: The date when you are expected to make your first loan payment.
  • Payment schedule: When you are required to make payment and how many payments you have to make.
 

How Different Types of Student Loans are Affected by Interest Rates

  • Government-Subsidized loan: If you are the recipient of a government-subsidized direct loan, the government will pay your interest while you are in school. This means that your loan balance will not increase. After graduation, the interest becomes your responsibility.
  • Parent PLUS Loan: There are no government-subsidized loans for parents, and regular repayments are scheduled to begin 60 days after the loan is disbursed.
  • Unsubsidized Loan: The majority of students will have unsubsidized loans where interest is charged from day one. If you have this type of loan, sometimes a lender will not require you to make payments while you are still in school. However, the interest will accrue, and when you graduate you’ll find yourself with a loan balance higher than the one you started with. This is known as capitalization. 
Here’s an example: In your freshman year, you borrow $7,000 at 3.85%. By the time you graduate in four years, this will have grown to $8,078 – an increase of $1,078. Here’s the math: 7,000 × 0.0385 × 4 = $1,078 (
Click here for ELFI’s handy accrued interest calculator.)  

How is Student Loan Interest Calculated?

When you begin to make loan payments, the amount you pay is made up of the amount you borrowed (the principal) and interest payments. When you make a payment, interest is paid first. The remainder of your payment is applied to your principal balance and reduces it.    Let’s suppose you borrow $10,000 with a 7% annual interest rate and a 10-year term. Using ELFI’s helpful loan payment calculator, we can estimate your monthly payment at $116 and the interest you will pay over the life of the loan at $3,933. Here’s how to determine how much of your monthly payment of $116 is made up of interest.   1. Calculate your daily interest rate (also known as your interest rate factor). Divide your interest rate by 365 (the number of days in the year).  

.07/365 = 0.00019, or 0.019%

    2. Calculate the amount of interest your loan accrues each day. Multiply your outstanding loan balance by your daily interest rate.  

$10,000 x 0.00019 = $1.90

  3. Calculate your monthly interest payment. Multiply the dollar amount of your daily interest by the number of days since your last payment.  

$1.90 x 30 = $57

 

How is Student Loan Interest Applied?

As you continue to make payments on your student loan, your principal and the amount of accrued interest will decrease. Lower interest charges means that a larger portion of your payments will be applied to your principal. Paying down the principal on a loan is known as amortization.  

How Accrued Interest Impacts Your Student Loan Payments

The smart money approach is avoiding capitalized interest building up on your loan while you are in school. This is because choosing not to pay interest while in school means you will owe a lot more when you come out. The more you borrow, the longer you are in school, and the higher your interest rates are, the more profound the impact of capitalization will be.  

How to Find the Best Student Loan

When looking for the best student loan, you naturally want the lowest interest rate available. With a lower interest rate, the same monthly payment pays down more of your loan principal and you will be out of debt more quickly. Talk to ELFI about our private student loan offerings by giving us a call today!  

Learn More About ELFI Student Loans

  Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-07-27
The Importance of a Good Debt to Income (DTI) Ratio

It is evident to most people that having more income and less debt is good for their finances. If you have too much debt compared to income, any shock to your income level could mean you end up with unsustainable levels of debt. Every month you have money coming in (your salary plus additional income) and money going out (your expenses). Your expenses include your recurring bills for electricity, your cell phone, the internet, etc. There are also regular amounts that you spend on necessities, such as groceries or transportation. On top of all of this, there’s the money you spend to service any debts that you may have. These debts could include your mortgage, rent, car loan, and any student loans, personal loans, or credit card debt.  

What is the Debt-to-Income Ratio (DTI)?

The Debt-to-Income Ratio (DTI) lets you see how your total monthly debt relates to your gross monthly income. Your gross monthly income is your total income from all sources before taxes and other deductions are taken out. Below is the formula for calculating your DTI:

DTI = (Total of your monthly debt payments/your gross monthly income) x 100

  Example: Let’s suppose the following. Your gross monthly income is $5,000, and you pay $1,500 a month to cover your mortgage, plus $350 a month for your student loans, and you have no other debt. Your total monthly payments to cover your debts amounts to $1,850.  

Your DTI is (1,850/5,000) x 100 = 37%

Here’s a
handy calculator to work out your DTI.  

Why is Your DTI Important?

Your DTI is an important number to keep an eye on because it tells you whether your financial situation is good or if it is precarious. If your DTI is high, 60% for example, any blow to your income will leave you struggling to pay down your debt. If you are hit with some unexpected expenses (e.g., medical bills or your car needs expensive repairs), it will be harder for you to keep on top of your debt payments than if your DTI was only 25%.  

DTI and Your Credit Risk

DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)  

So, What is a Good DTI?

If 43% is the top level DTI necessary to obtain a Qualified Mortgage, what is a “good” DTI? According to NerdWallet, a DTI of 20% or below is low. A DTI of 40% or more is an indication of financial stress. So, a good rule of thumb is that a good DTI should be between these two figures, and the lower, the better.   

The DTI Bottom Line

Your DTI is an essential measure of your financial security. The higher the number, the less likely it is that you’ll be unable to pay down your debt. If there are months when it seems that all your money is going toward debt payments, then your DTI is probably too high. With a low DTI, you will be able to weather any financial storms and maybe even take some risks. For example, if you want to take a job in a field you’ve always dreamed about but are hesitating because it pays less, it will be easier to adjust to a lower income. Plus, debt equals stress. The higher your DTI, the more you can begin to feel that you’re working just to pay off your creditors, and no one wants that.  

DTI and Student Loan Refinancing

Your DTI is one of several factors that lenders look at if you apply to refinance your student loans. They may also assess your credit history, employment record, and savings. Refinancing your student loans may actually decrease your DTI by lowering your monthly student loan payment. This may help you, for example, if you want to apply for a mortgage. ELFI can help you figure out what your DTI is and if you are a good candidate for student loan refinancing. Give us a call today at 1.844.601.ELFI.  

Learn More About Student Loan Refinancing

  Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.