Many people who have federal student loans can lower their payment significantly by entering into a plan that is income based. However, plans like Income Based Repayment (IBR) and Income Contingent Repayment (ICR) have a key component: your Adjusted Gross Income (AGI). So, the amount of your AGI in the previous tax year can be critical to these plans working for you. So what do you do?
The first thing is to lower your AGI by maximizing certain deductions. Talk to a tax professional, but AGI is usually calculated by deducting the following expenses from your annual total gross income:
- Educator expenses (applies to eligible educators for up to $250)
- Certain business expenses of reservists, performing artists, and fee-basis government officials
- Health savings account deduction
- Moving expenses
- Deductible part of self-employment tax
- Self-employed SEP, SIMPLE, and qualified plans
- Self-employed health insurance deduction
- Penalty on early withdrawal of savings.
- Alimony paid out
- Deduction for contributions made to your traditional IRA
- Student loan interest deduction (how about that!)
- Tuition and fees and
- Domestic production activities deduction
Be careful when figuring the amounts for these categories, as special requirements must be met for each, and again, consult with a tax professional. But if you can maximize your "above the line" deductions and lower your AGI significantly, it can have a big impact on your student loan payment.
File Separate Tax Returns
Another way to lower it is for married couples. Do you owe federal student loans, but your spouse does not? Do you currently file a joint tax return? If so, your spouse's income in the joint AGI might hinder you from getting a lower student loan payment.
Talk to an accountant about the tax impact of filing separate returns. If doing so would increase your taxes by $2,400 ($200 per month) but lower your student loan payments under IBR or ICR by $400 per month, that would be a great deal!
If you live in southern New Jersey and would like to consult with me on getting a better payment plan for your loans, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.
If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.