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All,

Changing jobs, and getting ready for the next tax year - I'll move up a tax bracket and have some deductions phased out. The upshot of this is the student loans I've been intentionally slow paying (because the interest rate is low) will no longer have tax deductible interest and I'll be paying with much more expensive money, post tax, than i would have if i paid it off early.

FWIW

Danbobtx

Not necessarily a bad problem to have, but not something I'd thought about.
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Changing jobs, and getting ready for the next tax year - I'll move up a tax bracket and have some deductions phased out. The upshot of this is the student loans I've been intentionally slow paying (because the interest rate is low) will no longer have tax deductible interest and I'll be paying with much more expensive money, post tax, than i would have if i paid it off early.

Well, maybe. The 'much less expensive pre tax money' saves you, at most, 25% on the interest paid. However, making payments to pay student loans off over 10 years (the default timeframe for many student loans) vs. 30 years (a common extended timeframe for student loans) will require you to make payments that are 2.12 times as high from a cash flow perspective. For every $10k in loans you have, at 4%, that's a $101.25 payment per month vs. a $47.75 payment per month.

For every $10k at 4%, in the first year of making student loan payments, you will get a $99.20 deduction when paying over 30 years vs. a $96.22 deduction when paying over 10 years. That's a $2.98 tax savings. In the 5th year of making payments, the deduction benefit widens to $89.64 vs. $51.20 (a $38.44 tax savings) and in the 10th year, it widens to $80.15 vs $6.48, for a $73.67 tax savings.

At the end of the 10th year, your student loan balance on the 30 year payment timeframe loan is $7,877.15 vs $0 on the 10 year time frame loan. In the 11th year of making payments on $10k at 4% vs. making no payments on the loan paid off over 10 years, the deduction benefit is be the widest it will ever be, at $77.58

In the mean time, if you are eligible for a traditional 401(k) or 403(b) at work and are not already maxing out the contribution at $16,500/year, you could put the additional $53.50/month into the retirement plan and realize a $160.52 tax benefit, because the entire contribution is deductible vs. just the interest. And if your contributions earn 6%/year, you will have an additional $8,810.64 in your retirement account, after having realized significantly greater tax savings.

So, if you are fairly confident that over the timeframe you will be paying off the loan, you can realize a higher rate of return than your interest rate, and can get a better tax savings by investing in a retirement plan, you will come out money ahead by paying the loans slowly.

On the other hand, if you don't want to be making the payments for 30 years, and having the loan negatively impact your Debt to Income ratio when borrowing for other loans (for instance, a car or a mortgage), you might want to pay it off over the shorter period. But the tax benefit alone is not really a significant savings.

AJ
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Good post, AJ

DW and I are about 11 years into a 30 year payback on her loans (combo of undergrad and law school debt). We were able to consolidate and lock in a fixed rate of 3.5% when her loans entered repayment. We pay $350/month, compared to the $800/month it would have been on a 10 year schedule. With dual incomes, we very quickly hit the deduction phaseout, then lost the deduction entirely. Still, no complaints here. 10 years later, the payment is roughly 3% of our monthly net income, so I'm more than happy to let it ride out its full term.

One big advantage, as far as I see it, is that money loses value over time. Through the cumulative effects of inflation, $350 is worth less in year 29 than it is in year 9. Also, as AJ noted, paying a lesser monthly payment has made it easier for us to max out 401k contributions and other savings. Our net worth today is more than 10X the current loan balance.

Another seldom mentioned benefit of (federal) student loan debt is that if the recipient dies, the student loan debt dies with them. The estate/spouse/etc is not required to repay the loan.
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