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?

Maximize Deductions

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!

Need Help?

If you are looking for a solution to your student loan problem and wondering if there is one, then there is a great way to find out for free! Just click here to provide me with all the details on your loans. I will then, for free and with no obligation on your part, look at your situation to see if I can provide you with a way to deal with them. If there isn't one, it didn't cost you anything. If there is, then I will contact you to schedule an analysis session with my office to lay out a plan of action.

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.

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.