How much of my student loan i should pay off immediately?

I left school this summer. Here is my financial situation.

*Total debt of student loans (including interest) around 40K Breakdown of these loans: Graduate plus loans 20K @ 8.5% interest rate Unsubsidized Stafford Loans 12694 @ 6.8% Subsidized Stafford Loans 8,500 @6.8%

*Earnings from work this year 20K

*Taxes paid 6K (approx.)

*Savings 38K

My question is should I use funds from savings to pay off my grad plus loans (higher interest rate). I am thinking of taking off 30K from savings to pay off my student loans. If I do so, would I still be able to get refund for the taxes I have paid at the time of filing my tax returns. What is the best course of action I should take to get as much refund as I can. Also I would like to pay off my loans so that I don?t accrue too much interest rate. Im 27 and single. Don?t have a job yet and am living with my parents. And im hoping to get a job in the next 2/3 months. To date i have accrued interest in the amount of $2000

Thanks.

Reply to
Jahan
Loading thread data ...

This newsgroup is devoted to "Taxes." You are asking a financial question that will generate lots of opinions.

From a tax perspective and assuming your income doesn't exceed ~$70,000, your student loan interest is deductible from gross income even if you do not itemize deductions. See the instructions for Line 33 of the Form 1040.

From an investment point of view, you have to have to ask yourself how much of a return are you making on your savings vs how much of a return you make on paying down debt (after taxes). In other words, are you making a higher rate of return after-taxes on your savings then the after-tax rate you are paying on your debt. If not, then financially it makes sense to pay off the high cost debt. As an aside, if you are also paying off credit card debt, then that debt would be the highest cost debt and should be paid off first.

However... everyone should have some cash readily available for emergencies and any other contingencies that may arise. You will need to decide how much of that $38K in savings you need to keep for that purpose. Any excess should be used to pay-down credit card debt followed by the 8.5% loan if the return on savings is less.

Reply to
Alan

This is a financial planning question rather than a tax question; while there are tax implications of any move you are not in such a high tax bracket, so there tax implications would be small.

Financially you are better off paying the 8.5% interest loan from your savings, assuming it has no pre-payment penalty, because you cannot in the present market make 8.5% risk-free on any investments.

One reason not to do this is if you need the savings for a financial cushion. It sounds like this may not apply to you since you have a stable place to live (your parents'). On the other hand, you do not yet have a job. The sensible thing to do might be to wait until you have a job, and have assessed that the job will be ongoing, before paying off the 8.5% interest loan.

Paying off the Stafford loans is not as attractive.

Hope this helps.

Steve

Reply to
Steve Pope

Note however, that your deduction is limited to $2,500.00 of interest. Therefore, from a tax standpoint, you should pay down the loan to the point where the interest accrued in a year will not exceed $2,500.00.

You need to ask that elsewhere.

Reply to
D. Stussy

That makes some sense if the interest you paid was available as a tax credit.

Since it is just a reduction of income, it is still a good idea to pay down the loan ASAP if you can afford to do so, since the tax savings is a small percentage of the interest paid.

Reply to
Arthur Kamlet

snipped-for-privacy@panix.com (Arthur Kamlet) wrote in news:g9q617$naq$ snipped-for-privacy@reader1.panix.com:

I don't know whether this may apply, but through NIH there are programs that if you work in research, up to $35000 of student loans can be forgiven per year or per 2-year period (I believe). See

formatting link

Reply to
Han

How do they determine the interest part of your payment? Consider the

20k at 8.5%. Over one year the interest on it is about $1700. If you choose to pay $200 a month, how much that is interest? In a fixed 30 year mortgage, these numbers are fixed in stone by a formula, but how does one figure it out for the loan where you decide how much to pay each month, if at all?

I'm putting as many tax details, and few financial planning details as I can:

Suppose all $1700 is interest.

Your earnings seem to put you in the 15% bracket. The tax savings on $1700 interest is therefore 0.15*1700%5. The interest you can earn on $1700 is now about 3%, or $51, on which you pay 15% tax and are left with $43. So it looks like it is better to pay the interest.

Note that if your income is very high, the tuition interest deduction is phased out.

If the tuition and fees deduction is available, it's probably a good idea to take advantage of it.

6k seems a bit high! The exemption is about 3.5k, and standard deduction about 5.5k, so net about 9k. Your taxable income, including interest, is then under 12k. Tax on this should be around $1200.
Reply to
removeps-groups

I would expect that the interest portion is calculated on a payment-by- payment basis, by simply computing the amount of interest for the period on the current outstanding balance. Kind of like the way credit card interest is computed. That gets you the interest component of the particular payment, and any excess reduces principal.

Reply to
Tom Russ

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.