Man, I love summer. Longer days, time outside in nature, burgers on the grill… scorching hot weather… Okay, so that last part not at all.
And the heat continues to turn up across the US and parts of Europe (it was so hot they closed the Acropolis multiple days in a row).
Seems like a good time to make sure your AC is working well… maybe even start on some energy efficiency home improvement measures. If you are going that route, you could also take advantage of some tax savings too — in the form of the Energy Efficient Home Improvement credit.
Now, if you’re one of the many federal student loan borrowers, you most likely received an email over the weekend from the Secretary of Education about the Biden administration’s plans post-Supreme Court student debt cancellation decision. (Wow, that was a mouthful.)
Of course, they mentioned ways they still want to help you (even if it’s not the 20 thousand in loan forgiveness). More importantly, the note ended with an encouragement to start readying for repayment soon.
That’s what I want to help Chattanooga borrowers like you do today.
A Restarting Student Loan Debt Repayment Guide for Chattanooga Borrowers
“I got a lot of free help from very good coaches. Now I am trying to repay that debt.” – Boris Spassky, chess champion
After more than three years… a major financial situation is about to change for you if you have outstanding student loans.
The student loan repayment moratorium has been in effect since March 2020 — but is set to end this August after the Supreme Court decided late last month that forgiveness of the loans was unconstitutional. Borrowers will once again be required to make payments on their student loans — and if you’re one of them and you’re worried, you’re not alone.
Half the student loan borrowers in a recent survey said they won’t have enough money to make their repayments by this fall, with a lot of those folks banking on informal loans and gifts to make their payments.
If you need budgeting help to start facing your student loan debt again, definitely let us know. But right now, I want to start examining how repayment will affect your taxes.
Student load debt: The news isn’t all bad
You will be happy to know that student loan debt re-ignites some tax deductions and credits for you.
Interest deduction: This is money you can take off your taxes for the interest you paid during the year on a qualified student loan. You can deduct 2,500 dollars from your taxable income or the amount of interest you paid during the year, whichever is less. (The deduction is gradually reduced, eventually eliminated, when your income reaches a certain amount for your tax-filing status.)
American Opportunity Credit: You can get the AOTC for up to four taxable years for students enrolled at least half-time who are pursuing a degree or credential. The AOTC maxes out at 2,500 dollars per student per year and matches 100% for the first two grand of eligible expenses and a 25% match for the next 2,000 dollars.
Forty percent of the resulting credit (a maximum of a grand) is refundable and available regardless of your tax liability. The remaining 60% is nonrefundable (meaning it can cut your tax bill to zero but can’t generate a tax refund).
Lifetime learning tax credit: You can claim the LLTC for unlimited years of education. Also, students don’t have to be going after a degree or credential. The LLTC has a max value of 2,000 dollars per tax return, calculated as a 20% match of up to 10,000 dollars of expenses per return. It is nonrefundable.
Both of the above phase out for Single taxpayers with a modified adjusted gross income of 80 to 90 grand. Qualifying expenses don’t include such living expenses as room and board but do include tuition and required fees. You can only claim one education tax credit per student per year, but you can claim the credits for your expenses or those of a dependent child or relative. (Generally, the dependent must be younger than 19, but the age limit is through age 23 for full-time students.)
As always, there are a few other restrictions and conditions, which we’re happy to walk through with you.
Budgeting: A key to paying back student loan debt
We know, this student loan repayment break was a lifeline. But the reality is, you can’t depend on a lifeline all through life.
What you can depend on is planning.
If you’re like most borrowers, you’ll have to come up with a median loan repayment of about 250 dollars a month. So first, figure out your amount and start budgeting for when repayment begins. See what you’ll owe by what deadlines and start looking at expenses that you’ll incur around the same time.
Generally, when aligning your debts (including student loan debt), you want to look at high interest versus low. High-interest debt usually costs you more in the long run. Other expenses are pretty much inflexible, like housing, basic food, and transportation (such as your car) that you may need to get to work.
It is worth saying that defaulting on student loans can come with a harder bite than defaulting on, say, credit card payments. It won’t go immediately to collections, nor should you depend on loan forgiveness getting a second life in our political environment.
But if you don’t pay your student loans, you’ll start seeing late fees and accrued interest after 30 days… and after 90 days, your late payment gets reported delinquent to the credit bureaus, likely hurting your credit score. The feds can also soon after start garnishing your wages, tax refunds, and disability or Social Security payments.
If you’re struggling to make payments on your student loans, there are resources available to help, such as income-driven repayment plans and loan forgiveness programs. You have options — and, for your taxes, even a few advantages.
Even when it feels like life throws curveballs at you (like the Supreme Court with Biden’s student loan debt forgiveness plans), there is always a way to slow down and make a plan of action that works for you and your family.
In your corner,
John and Wanda King