Americans hold $1.6 trillion in student loan debt.
The College Board estimates that college graduates with student loans leave school with an average debt of $29,000.
The financial burden is shaping the lives of college graduates.
Young professionals are delaying major events like getting married, having a child, and buying a home.
Student debt will continue to rise unless the government overhauls the education system or forces colleges and universities (that are sitting on hundreds of millions (sometimes billions) of dollars in endowment funds) to curb the rapid increase of tuition and fees.
Graduates and future graduates with student loans need to take control of their finances by understanding the numbers.
Make interest payments while you’re in school
For most student loans, interest begins accruing at the time the loan is disbursed.
While you’re listening to a lecture or eating in the dining hall, your loan is already growing little by little.
The majority of student loans start repayment six months after you leave school. At that point, any unpaid interest gets capitalized.
Capitalization means that unpaid interest that accrued during the deferment period becomes part of the loan’s principal balance, which increases the original loan amount.
Impact of Capitalization Example
Try using this capitalization calculator to see how capitalization could impact your student loan.
Making interest payments while you are in school will benefit you in two ways:
1. You’ll have a history of making a monthly payment. By extending your history of on-time payments, your credit score will steadily increase. The length of your credit history is the third most important factor in determining your credit score.
2. Your bank account will thank you. Paying the accruing interest during school means when you leave school thousands of dollars won’t be added to your original loan amount. Sure, you’ll have a higher payment now that you are paying principal and interest, but it would be higher had you not paid the interest during those four years at school.
Consider refinancing your student loans
Refinancing means that you negotiate a fixed or variable interest rate that is lower than the current interest rate on your loan.
A lower interest rate means a lower monthly payment.
Refinancing student loans can also benefit your credit score. A lower monthly payment can help you make on-time payments, which boosts your score over time. On-time payments are the most important factor in determining your credit score.
To refinance your loans, you’ll need a credit score at least in the 600s, a steady income, and in some cases a cosigner.
Refinancing will eliminate federal loan benefits like income-driven repayment or certain forgiveness programs, so make sure you weigh all options.
Deduct student loan interest on your tax return
The student loan interest deduction reduces your taxable income by the amount of student loan interest you paid during the year up to $2,500.
Sometime in January you’ll receive or need to print-off Form 1098-E Student Loan Interest Statement from your lender. The statement will show the interest you’ve paid for the prior calendar year.
To claim the deduction, you must meet the following requirements
· Your filing status is not married filing separately
· No one else can claim you as a dependent on their tax return
· You are legally obligated to pay interest on the qualified student loan
· For the full deduction, your modified adjusted gross income (MAGI) is less than $70,000 (or $140,000 for married filing jointly) in 2019.
Bottom line – keep track of your finances
Paying off your student loans will take time.
If you develop a budget early on, you’ll be able to tackle each monthly payment with a small victory dance.
Check out free budgeting apps that help you track your spending and set thresholds for certain categories.
If you are the type that is overwhelmed by numbers, cannot remember a due date, or simply does not have the time to manage your bills, reach out to Quill & Keyboard Accounting. We are here to help.