If your student loans have you feeling down, just remember that there are over 44 million people in the United States who also have student loans, so you’re not alone.
Like most of these 44 million people, you are probably looking for ways to make paying back this debt easier. Fortunately, by consulting a financial planner, you will be able to come up with several strategies that will allow you to do this.
WHAT IS AN INCOME-DRIVEN REPAYMENT PLAN?
Income-driven repayment plans are government-backed plans that let borrowers pay back a percentage of their “discretionary income” toward their student loans for up to 25 years.
Once their program is up, their remaining loan balances will be forgiven.
The only caveat to note here is that, with income-driven repayment plans, you do have to pay income taxes on forgiven loan amounts during the year they were forgiven.
However, most borrowers can still come out way ahead even after paying the income tax that final year. It just takes a well strategized financial plan.
MAX OUT YOUR EMPLOYER-PROVIDED RETIREMENT PLAN
An easy first step to lowering your income-driven student loan payment is to put the maximum into your traditional 401(k), 403(b), or 457 plan.
You may be wondering why this makes sense. After all, wouldn’t putting money into your 401(k) mean you have less cash to make your student loan payment?
This is because your income-based repayments are based on your adjusted gross income, or the amount of income you’re taxed on after taxable deductions.
And guess what? Contributions to your 401(k) are taxable deductions. This means that when you put money into your 401k, your adjusted gross income goes down. Therefore, you may qualify for lower student loan payments, and as an additional bonus, you are saving more for retirement, and will be paying less in annual taxes.
To reiterate, when you put money into your traditional 401(k) you:
- Save money on taxes
- Score a smaller income-driven repayment payment
- Save for retirement
By following these steps AND consulting a Certified Financial Planner, you will be well on your way to a better financial future.