Federal student loan debt has grown enormously in the United States. As of March 2023, there’s approximately $1.57 trillion collectively owed by around 44 million Americans. This figure continued to increase even during the global COVID-19 pandemic.
What’s more shocking is that baby boomers owed an average of $75,000 in student loan debt. They’re currently the top borrowers, with a rise of 33% in student loans in 2020.
If you or your loved ones are one of those baby boomers, here are some ways to tackle student loans.
Borrowers of any age group, not only boomers, often get overwhelmed by their student loan debt. Many feel disconcerted monitoring it, so they end up ignoring it. Others don’t even know how much they owe and its accrued interests.
However, knowing your specific liabilities and current finances is the first step to conquering debt. It doesn’t only help you come up with a focused debt payoff plan but also find a suitable student loan interest deduction in the future.
Start by making a detailed list of each loan, including its balances, interest rates, and repayment terms. From there, make a plan and strategy to aggressively confront your debt.
As mentioned earlier, knowing the scope of your debt helps you get a student loan interest deduction. It’s a tax break of up to $2,500 in interest paid from any student loan borrower’s tax.
Note that it’s only deductible if the student loan borrower has less than $70,000 of modified adjusted gross income (MAGI). If the student loan is taken jointly, then the MAGI requirement is $145,000.
If a borrower’s MAGI surpasses $70,000 but not more than $85,000, they may still be able to get a student loan interest deduction but lower than $2,500. The same goes for a joint student loan account that surpasses $175,000.
Another thing to note is that student loan interest deduction is taken above the line, not an itemized deduction. In other words, it’ll be deducted from your taxable income. For example, if you belong to the 22% tax bracket, then the deduction can help keep $550 back in your pocket.
These figures can be subject to change, so it’s better to directly inquire the Internal Revenue Service (IRS) about student loan interest deductions. You can leave an inquiry on their website or visit them at their nearest office. If you want to read more, check this IRS Publication 970 Tax Benefits for Education.
The Income-Contingent Repayment (ICR) Plan is another federal initiative to help borrowers pay off their student debt quickly. It works by pegging monthly payments to a borrower’s total amount borrowed, income, and family size. However, it’s more directed to borrowers who pursue careers in public service and other jobs with lower salaries.
The maximum repayment period for ICR plans is 25 years. After making 240 monthly payments (20 years) or 300 monthly payments (25 years), any outstanding debt will be forgiven. Instead, it’ll be treated as taxable income, requiring the borrower to pay income taxes for a quarter-century on the amount forgiven.
While paying income taxes for 25 years may sound like a financial burden, it brings significant savings, especially for those who wish to be public servants. Additionally, paying taxes for a long time means the tax’s net present value is relatively small.
Another advantage of ICR is that a borrower won't be locked into it despite signing up for a 25-year plan. Should there be any circumstance that may change a borrower’s payment plan, they may freely do so.
Lastly, note that ICR is only available from the U.S. Department of Education, not other private institutions with government-guaranteed loans and financial institutions. If you have questions or need assistance, contact the agency online or by phone or visit their nearest office.
Always seek professional help if there are many things you can’t figure out well. It's particularly true if you’ve been trying different ways to fit paying student loans into your budget, but nothing just works in your favor. Instead of losing money from wrong choices, it’ll be better to spend it on hiring a professional.
Look for a financial professional who won’t only help you map out a plan to pay off your student loan debt but also keep your finances in check. They should be able to advise the best financial management based on your current financial situation and future goals.
If you plan to refinance your student loan debt, a financial professional can also be invaluable in increasing your chances of getting approved for it. Just ensure you have all the required documentation for faster approval and loan process.
Battling against rising student loan debt is no easy feat, especially when you’re an older adult. It takes a lot of courage and effort to deal with it despite old age. However, know that you’re not alone on this. There’s always help available, so don’t hesitate to leverage them.
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