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Tax Consequences of Repaying Your Student Loans

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If you read enough about higher education, student loans, the cost of education, and personal finance, you will get a wide variety of opinions on the matter. Some will say that higher education is a joke, and you can get a great job without a college degree. Others will say that you need the education in order to truly be competitive in the market today. Some will agree that you need an education, but the costs are way too high; others will still claim it’s a great investment. Then there comes the matter of paying off your student loans and there are yet more opinions on the matter. How do you make sense of it all? Your accountant in Billings, MT explains what your options are after you have decided to get a degree, and you are now stuck paying off your loans.

 

 

The Silver Lining: Tax Deduction

If there is one good thing that comes from having large student loans is that you get to deduct the interest you pay on them from your taxes. Since the loan rates vary depending on when you received the funds, we will use an average of about 4.5% interest (you could likely be higher, or lower, than this rate). And since the amount you owe varies depending on how long you went to school and where, we will use $40,000 as the total amount owed.

Every year you will pay back some of your loans, and every year the interest you pay will get smaller and smaller. Our analysis looks at the first year on loans with a payback period of 15 years.

Using these numbers, your loan repayments will cost you $306 per month, for 180 months. You will pay a total of $55,079 and $15,079 will be interest. During your first year you pay $1,760.90 in interest, and $1,911.10 in principal.

The good news is that you can deduct this interest off your taxes, even if you don’t itemize your deductions (the standard deduction is $6,300 for a single filer in 2015). So your student loans will save you $440 (assuming a 25% tax bracket) no matter what your other deductions turn out to be. But that loan is still costing your $1,320 per year.

Paying Off Your Student Loans

Many people hate to be in debt. Even thought student loans are considered “good” debt in the sense that they help you earn more money and the interest is deductible, most want it gone. This is actually not that hard to do, but it does require some planning, discipline, and hard work.

Using a Bankrate Student Loan Calculator we can find out how much faster you will pay off your debt by figuring in additional payments. Suppose you add $100 every month to your payment, then you pay off your loan 5 years sooner and save around $5,000 in interest. Bump that repayment up by $250 and you save $9,000 by paying them off 8 years sooner.

But the bigger question is how do you come up with the money to pay off your loans faster? The answer is to start pulling some side jobs. These are any skills that you have that you can monetize. Cleaning houses, mowing lawns, fixing cars, writing for websites, or anything else can all be monetized if you market to the right person. Putting 100% of that extra income toward your loans can wipe them out incredibly fast. Want more proof? Check out Joe Mihalic’s blog about how he paid off $90,000 in student loans in just 7 months.

With a little frugality, some entrepreneurial spirit, and a whole lot of discipline, there is no reason that you shouldn’t be able to wipe out your debt in just a few short years.

Practical Taxes Can Help

If you are spending your time earning extra money in order to pay off your loans quickly, you will need all the time savers that you can get. If you are pulling a side job, then you will have tax consequences. Let us prepare your taxes for you so that you can focus on bringing in even more money. If your side business grows big enough and you need employees, let us do your payroll so you can focus on finding more jobs. We are a full service accounting firm in Billings, Montana. No matter what your accounting needs are, we can take care of them. Call us at 406-894-2050 to learn more.

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