Monthly Archives: April 2010

Tax Consequences of Student Loans

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For the last installment of the Student Loan Series, we’re going to be talking about the tax consequences of student loans. Previously we covered whether college is worth the cost, the different types of student loans, and repayment options.

There are several tax advantages of college students, and we’ll look at a few of them here:

Student Loan Interest:
The most common tax advantage of student loans comes in the form of student loan interest being tax deductible. You can write off up to $2,500 of annual student loan interest charges. This advantage phases out when your modified adjusted gross income (MAGI) is between $60,000 and $75,000 for single filers and between $120,000 and $150,000 for joint filers.

The $4,000 Deduction (or $2,000):
You may deduct up to $4,000 of college tuition and fees for anyone on your tax return. There is no need to itemize, but regardless of how many students are in your family, $4,000 is the annual maximum.

In order to qualify, your MAGI must be below $65,000 for single filers, $130,000 for joint filters. Single filers whose MAGI is between $65,001 and $80,000 and join filters whose MAGI is between $130,001 and $160,000 are entitled to a $2,000 reduction.

In addition, no deduction is allowed for a person who can be claimed as a dependent by someone else. You are not eligible if you are married and filing separately.

The American Opportunity Credit:
You may claim the first $2,000 of a college student’s annual tuition and fees plus 25% of the next $2,000 for a maximum of $2,500 per student. This credit can be claimed for four tax years for any student. The credit is phased out between AGI of $80,000 to $90,000 for single filers and between AGI of $160,000 and $180,000 for joint filers.

The Lifetime Learning Credit:
This is similar to the American Opportunity Tax Credit, but the number of years you can claim it is unlimited. The credit is 20% of tuition and fees up to $10,000, for a maximum annual credit of $2,000. The credit is phased out between AGI of $50,000 to $60,000 for single filers and between AGI of $100,000 and $120,000 for joint filers.

Tax-Free Employer Education Reimbursements:
If your employer reimburses you for classes you take, up to $5,250 of that income is tax free. This includes graduate-level courses. Dependents don’t count, but there are no maximum income limits.

With all of these deductions, your tax bill is now lowered by the amount of the deduction. Rather, your tax liability is lowered. So you pay taxes on less of your income. For example, someone making $55,000 per year and writing off $2,500 in student loan interest would now have a tax liability of $52,500. Assuming they are in the 25% tax bracket, they would be saving $625 ($2,500 x .25).

While these deductions will not cover even a significant portion of the student loans, they do make it a little easier to handle it all. I encourage everyone to look at these tax breaks and save a little money each year.

Readers, which student loan tax deductions are you taking advantage of?

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Student Loan Repayment Options

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In the first two days of the Student Loan Series, we covered whether college is worth the cost and the different types of student loans. Today we’ll tackle student loan repayment methods.

There are several ways of repaying student loans. Each has its benefits for people in specific situations, so let’s explore the different types of repayment options.

Repayment Options

I’m going to be using Citi’s repayment plans as a model (I have my loans through them and they do a great job of explaining the differences between the various options).

Standard: This option means making monthly payments by making consistent payments. This is the only option for private loans. However, it is also the least expensive choice because you are not extending the term of the loan.

Graduated: This plan means making smaller payments for the first few years and then making larger payments afterward. This is great for people who are starting their career because they can pay may as their income grows.

Income-Sensitive: With this option, you pay what you can currently afford. The payments are either the monthly interest accrued or 1% of your gross monthly income, which is greater.

Income-Based: People with a partial financial hardship (legally) may select this option. Payments are based on your income, family size, and the amount of debt you owe.

Extended: Those who owe more than $30,000 in federal loans can reduce monthly payments significantly by spreading them out over a period of up to 25 years. Not surprisingly, this is the most expensive option in the long term.

With most loans, there are no prepayement penalties. This means that with any of the above agreements, the payments are MINIMUM payments. You are allowed to make extra payments to pay down the balance of the loan, which helps reduce the amount of interest accrued as well as the length of repayment. An extra $300 now not only reduces the balance by $300, but also prevents you from having to pay interest on that $300 at any point in the future.

Loan Forgiveness Programs

There are also several loan forgiveness programs. There are different criteria to qualify for, but if you are willing to put in the time, you may be able to have a large portion of your student loans forgiven.

Here are the four ways to qualify for loan forgiveness:

Perform Volunteer Work: AmeriCorps offers up to $4,725 to be used towards your loan after serving for 12 months, while Peace Corps offers cancellation of Perkins Loans (15% per year, up to 70%).

Perform Military Service: Students in the Army National Guard are eligible for $10,000 of student loan repayment

Teach or Practice Medicine in Certain Types of Communities: Students who become full-time teachers in an elementary or secondary school that serves students from low-income families can have 15% of their Perkins Loans forgiven in each of the first and second years of teaching, 20% in the third and fourth years, and 30% in the fifth.

In addition, Secondary school math and science teachers, and elementary/secondary school special education teachers who commit to working in high-need schools for five years can obtain up to $17,500 in Stafford loan forgiveness. They must teach full time for five consecutive years in a qualifying low-income school and be “highly qualified.”

Meet Other Criteria: For those in legal and medican studies, Several US departments offer loan forgiveness. This includes the National Institute of Health, which repays up to $35,000 per year of student loan debt for students conducting clinical medical research.

Finally, while this is uncommon, borrowers may qualify for loan forgiveness after 25 years of active repayment.

Looking Ahead

As you can see, there are many options for repayment, and if you are willing to make a serious commitment, others will be willing to assist you in your repayment.

Now that we’ve covered the different types of student loans, tomorrow we’ll discuss the tax consequences of student loans. Sign up for the RSS feed or get email updates and make sure you don’t miss it!

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The Different Types Of Student Loans

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Yesterday we took a look at the need for student loans in order to pursue a college education and came to the conclusion that college education makes a big difference in future earnings and therefore is worth the costs.

Today, we’ll focus on the different types of student loans available to undergraduate students.

There are two main types of student loans: Federal student loans and private student loans. There are several types of federal loans, so let’s explore the options:

Federal Student Loans

Federal student loans have more favorable terms than private loans. The government sets a low, fixed interest rate, nearly all student are eligible to receive federal student loan money, and they feature a grace period after school during which no payments are due.

Stafford Loans: These loans are available to almost anyone who submitted a FAFSA, has a financial need as determined by the school, is enrolled at least half time.

There are two types of Stafford loans:

Subsidized Stafford Loans are need-based, and interest does not accrue on the loans while students are in school or during a six-moth grace period after leaving school.

Unsubsidized Stafford Loans are not need-based and students are responsible for all the interest that accrues on the loan, including they are in school.

The annual loan limits increase as students progress through school. The limits for dependents are:

Independents are eligible for an additional $4,000 in unsubsidized loans during the first two years of school and an addition $5,000 in unsubsidized loans during the last two years.

The fixed interest rates on subsidized Stafford loans first disbursed between July 1, 2009 and June 30, 2010 is 5.6%. For the following 3 years, interest rates will be 4.5%, 3.4%, and 6.8%, respectively.

All unsubsidized Stafford loans have a fixed interest rate of 6.8%.

Federal Perkins Loans

These types of loans are for students with the greatest financial need. It has a low fixed interest rate of just 5% and they share many of the characteristics of subsidized Stafford loans. In addition, they also include the advantages of not having fees and having a longer grace period.

Federal Parent PLUS loans

These loans are for parents of undergraduate, dependent students and can be used to fund the entire cost of a child’s education. The interest rates are a fixed 8.5%, so the other types of loans would be preferable, if available.

Private Loans

In addition to the federal loans, private loans may be available to cover the rest of the education costs for students. Those who will be taking responsibility for their loans without the help of their parents are the most likely candidates for private loans.

There are many companies that offer private student loans, with the major ones being Sallie Mae and Citi. Interest rates vary based on many factors, and lower rates go to those:

  • who have a higher credit score
  • who have a co-signer
  • who sign up for automatic debit payments

My private student loans current has a variable interest rate of 3.25, which is very low. Over the next few years, that rate is likely to rise, but for now, I am very happy with it.

Now that we’ve covered the different types of student loans, tomorrow we’ll take a look at the different repayment options and which option is best for certain situations. Sign up for the RSS feed or get email updates and make sure you don’t miss it!

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Is College Worth The Cost?

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Costs of college

The cost of college has been increasing for years and according to reports from College Board, the average private four-year college costs over $39,000 per year, while the average public university costs over $30,000 out-of-state or $19,000 in-state.

Students have a few choices when deciding where to go to college: They can go to a school that costs on average from $19,388-$39,028 per year, they can have their parents pay for school, or they can take out student loans.

Since most parents don’t have tens (or hundreds) of thousands of dollars saved up for their children’s education, two-thirds of 4-year undergraduate students graduated with some debt in 2007-2009 with the average balance for those who had student loans being over $23,186 (finaid.org). That doesn’t sound so terrible: the average amount of student loans for a graduating student is slightly than one year’s worth of expenses.

It’s fairly apparent that student loans are necessary for most students who want to pursue higher education, but for the extremely high cost, is it worth the investment?

Benefits of college

A 2007 College Board report shows that median lifetime earnings for individuals with bachelor’s degrees are 61% higher than median lifetime earnings for high school graduates with no college experience. For those with even higher degrees (like a PhD and maybe a masters degree online), the lifetime earnings are are 93% to 187% greater than a high school graduate’s (collegboard).

Taking into account loan payments, the typical student who borrows to cover all tuition and fees* begins to exceed the total earnings of a high school graduate at age 33 and has total lifetime net earnings of over 35% more.

*That is a big assumption, as we saw earlier that the average student has less than $24,000 in student loan debt upon graduating while the average cost of attending an in-state public college for one year is over $19,000. The average student would exceed the total earnings much earlier and have greater lifetime net earnings.

On average, the total net earnings of those with college degrees greatly outweigh those with just high school diplomas, so the choice of going to college seems very much worth it.

Now that we’ve determined that higher education is worth the cost, and since the costs are high, student loans are likely the way to go, we’ll investigate the different types of student loans in part 2 tomorrow. Sign up for the RSS feed or get email updates and make sure you don’t miss it!

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