Millions of Americans must file taxes by April 18. 40 million student loan borrowers find repayment, forgiveness, and taxes more confusing than ever.
However, there are strategies available to many individuals that can reduce their student loan repayment obligation, their tax burden, or both.
AGI Reduction Can Lower Federal Student Loan Payments
Millions of borrowers of federal student loans rely on income-based repayment plans. IDR plans calculate monthly payments based on a borrower’s family size and income, typically their Adjusted Gross Income (AGI) as reported on their federal tax return.
AGI equals a person’s gross pre-tax income minus specific pre-tax deductions. Typically, IDR payments are recalculated annually through a procedure known as income recertification.
Loans under an IDR plan may be discharged after 20, 25, or even fewer years for borrowers in certain public service occupations.
These plans have become more appealing to many people since the IDR Account Adjustment was introduced; this one-time initiative may speed up borrowers’ progress toward loan forgiveness even for borrowers who are not currently in IDR.
Reducing your AGI can decrease your taxable income and consequently your tax liability. And for federal student loan borrowers enrolled in IDR, a decrease in AGI can also result in more affordable federal student loan payments.
There are numerous ways to lower AGI. Contributions can be made to tax-deferred retirement accounts such as 401(k) or 403(b) (b). Self-employed individuals may contribute to a traditional tax-deferred IRA or a solo 401(k). Additionally, you can contribute to a Health Savings Account (HSA). Consult your tax professional for additional AGI-reduction strategies.
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Joint Tax Filings Can Impact Your Monthly Payments
When calculating an IDR payment for married borrowers who file taxes jointly with their spouse, all four major IDR plans Income Based Repayment, Income Contingent Repayment, Pay As You Earn, and Revised Pay As You Earn will consider the combined income of the borrower and their spouse while also considering the spouse’s federal student loan debt.
This means that in certain circumstances, a spouse’s additional income may result in higher monthly student loan payments under an IDR plan.
The national student loan pause, which has suspended payments and frozen interest on the vast majority of federal student loans, will expire later this summer, despite the fact that it has been extended twice by the Biden administration.
Once the payment pause ends, borrowers who have been in an IDR plan should resume making payments at the amount determined by their last income recertification, which for many borrowers occurred in 2019 or 2020.
According to the Education Department, borrowers may not need to recertify their income for months.
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