Of course, it is inevitable that the “tax man” will take much of the cash you make from part-time gigs, even though you devote this money to student debt. However, there are a few tax benefits to paying off student loans. It is important to keep these tax considerations in mind while paying off student debt, since certain life decisions may allow you to maximize these tax benefits.
If you ever attended college or graduate school, your university likely mailed you a 1098-T tax form stating the amount of tuition and other related expenses you paid in the preceding year. This is because two federal tax credits exist that help students offset their tax liability for years in which they attended school. The American Opportunity Credit is mainly available to individuals who enrolled in an undergraduate degree program in a given tax year, and this credit allows taxpayers to offset up to $2,500 of tax liability in a particular tax year. The other tax credit available is the Lifetime Learning Credit, which mainly applies to individuals in graduate degree programs. This tax credit allows students to offset $2,000 of tax liability each year.
In addition, you can also of course take the standard deduction each tax year even if you are also claiming one of the educational tax credits noted above. The recent changes to the tax laws mean that you can now claim a $12,000 standard deduction each year. This means that you can make a significant amount of money while in school and pay no federal income taxes on any of the money you earned.
I experienced this benefit firsthand during my student debt repayment saga. As noted in a prior article, in order to minimize the amount of student debt I needed to borrow, I worked a few work-study jobs while attending law school. Due to the standard deduction and Lifetime Learning Credit, I received a substantial tax refund each year I attended law school, and this cash helped me lessen the amount of student loans I needed to borrow. All told, the availability of the standard deduction and educational tax credits incentivizes individuals to work while attending school. If you are thinking about earning a degree, you should definitely have one or more jobs while in school, so that you can fully benefit from these tax advantages.
However, it is still helpful to obtain this tax relief, and if you debt-financed college and graduate school like I did, chances are that you will pay more than $2,500 in student loan interest in any given tax year
It should also be mentioned that you simply need to attend school in a tax year to receive the benefit of these educational tax credits. As a result, if you enter the workforce and begin earning money in the same tax year you graduated from school, you will still be able to offset a sizable amount of income due to these tax benefits. Therefore, you might consider not taking a break between graduating from school and entering the workforce, since you need to earn income in order to maximize the gain you receive from these tax benefits. During my own student debt repayment saga, I made sure that I earned more than the amount of income that could be offset from these tax benefits during the tax year I graduated from law school, so that I received the most money back from the “tax man.”
This website has already discussed some of the tax implications of working side-hustles to pay off student loans
The other major tax benefit of having student debt is the student loan interest deduction. This benefit allows taxpayers who make less than a certain amount of money in a given tax year to deduct up to $2,500 of student loan interest paid in a particular year. Of course, this deduction is not as beneficial as the credits noted above, since this deduction only allows you to offset $2,500 of income whereas the credits allow you to offset $2,000 or $2,500 of tax liability.
The key to maximizing this benefit is understanding when the student loan interest deduction is phased out or eliminated. This deduction is not available to taxpayers who make more than $80,000 in a given tax year, and the deduction is phased out for taxpayers who make between $65,000 to $80,000 in a particular year. As discussed in prior articles, side-hustles can be a great way to earn extra money to pay off student loans. However, these income limits might discourage you from working side-hustles, since any extra money you earn from part-time gigs could mean that you are only allowed to deduct a smaller amount of student loan interest. If your income for a year is well below or above that $65,000 to $80,000 range, then this deduction should not affect your ability to work side-hustles. However, if your income is around this amount, installment online loans North Carolina you need to seriously assess whether side-hustles will positively impact your student debt situation.
Of course, the availability of the student loan interest deduction again incentivizes individuals to work as many side-hustles as possible during years in which you are student. If you attended school full-time for part of a year, it is likely that your income will be far below that $65,000 to $80,000 range in which the student loan interest deduction is phased out or eliminated. If you work side-hustles during such years and pay off student loans, you will therefore be able to maximize available tax benefits. Indeed, the only time I was able to use the student loan interest deduction was during the tax year that I graduated from law school and entered the workforce. All told, the student loan interest deduction should be seriously considered when deciding on a student debt repayment strategy.
In the end, everyone has different situations, and not every deduction, credit, or other tax benefit will be applicable to each student debt borrower. However, it is important to keep these tax benefits in mind so that you can pay off your student loans in the most strategic way possible.