Student loans understandably get a lot of hate from millennials who are eager to pay off their loan balances. And yet about 44 million Americans owe a collective total of $1.48 trillion in student loan debt, according to Student Loan Hero.
Some people are hell-bent on paying off their student loans as quickly as possible. They make sacrifices left and right to spend less, earn more, and hustle their debt away. They’ve seen how student loan debt can be a burden and a roadblock when trying to pursue their dreams.
Should I Pay Off My Student Loans Early? Crunching the Numbers
All of this considered, should these young people really be in such a hurry to pay off their student loan debt early?
Student loan debt has a silver lining: The interest you pay is tax-deductible. The student loan interest deduction can reduce the amount of your income subject to taxes by up to $2,500, according to the IRS. But like anything else, the subject isn’t cut and dry.
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Tips From a Pro
In an effort to help you decide if you should try not paying off your student loans early for the tax deduction, we talked to Eric Nisall, a tax accountant and the founder of AccountLancer.
“The general purpose of the deduction was to increase access to education and to help with the debt servicing after graduation,” Nisall said.
“As a beneficial tax deduction, I think it sucks!”
Nisall pointed out that there are a few flaws with the deduction, like the fact that it's phased out for filers with an adjusted gross income (AGI) of $65,000, and the benefit goes away entirely if your AGI is over $80,000.
Of course, the AGI limit is higher for those who are married filing jointly, but the deduction is still only $2,500, even if both spouses are paying back on qualified student loans.
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According to Nisall, the “sweet spot” for filers to take full advantage of the deduction is for those single or head-of-household filers with an AGI of less than $65,000. Even then, Nisall said that the tax savings would only be between $625 and $700 based on filing status.
“It’s important to remember that this is a deduction, not a credit, meaning that you are only reducing the taxable income by the interest amount, not reducing the actual tax dollar-for-dollar,” Nisall said.
So from a tax point of view, it doesn’t make much sense to stretch out your repayment schedule. But are there other reasons to consider?
Consider Your Quality of Life
Sure, I’m willing to make some sacrifices to pay more toward my debt, but not at the expense of my overall health and happiness.
Before you throw every penny you earn toward your student loans, make sure that you're satisfied with other things in your life. Getting out of debt is important, but so is taking care of your basic needs.
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Take Stock of Your Finances
Another obvious thing to consider is the rest of your financial situation. If you have no savings and a maxed-out credit card, your student loans should not be at the top of your list of financial goals.
Most financial experts agree that having a small emergency fund before tackling debt head-on is the key to long-term financial success. Instead of putting extra money toward your debt only to risk facing a financial emergency that you can’t afford, focus on building up a small savings fund first.
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Next, you should look at the overall picture of your debt. If you have other debt that costs you more in interest than your student loans, then that should be your primary focus.
Once you get down to just your student loans and other low-interest debt, the decision of how aggressive you want to be with your debt becomes more complicated.
If your interest rates are low enough, it might actually be a better idea to save and invest instead of paying your debt off early.
“There are people who have no problem having low-cost debt if that frees them up to use their cash to earn more than the loans cost,” Nisall said.
In the end, the decision of whether or not you should pay off your student loans early is up to you. The answer will be different for everyone, as no two situations are the same.
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