How to Lower Student Loan Payments: Start With Your Adjusted Gross Income

Your adjusted gross revenue (AGI) is used as a place to begin to assist decide your total tax legal responsibility annually. But it surely additionally serves as one of many main elements when calculating your federal scholar mortgage cost beneath an income-driven compensation (IDR) plan.

There are a selection of methods to successfully scale back your AGI, and in flip, decrease each your tax invoice and your scholar mortgage cost. Right here’s how.

What’s adjusted gross revenue?

Your AGI is principally your whole gross revenue for the 12 months after making changes for sure tax deductions.

Gross revenue combines all kinds of revenue obtained for the 12 months, together with:

  • Wages,
  • Enterprise revenue,
  • Dividends,
  • Capital features,
  • Retirement distributions,
  • And different types of revenue.

Revenue changes embody particular “above-the-line” tax deductions, akin to scholar mortgage curiosity and retirement contributions. In plain phrases, your AGI is calculated as:

Whole gross revenue – “Above-the-line” deductions = AGI

Nevertheless, not all tax deductions are thought-about “above-the-line”. For instance, deductions for medical bills and mortgage curiosity are thought-about “below-the-line” tax deductions and might solely be claimed in case you itemize your tax return (which most individuals don’t as a result of the usual deduction is so excessive now).

An itemized deduction finally ends up lowering your taxable revenue, which lowers your total tax legal responsibility. However they received’t have an effect on your AGI calculation.

This is a vital distinction to know as a result of your AGI has a direct relationship along with your federal scholar mortgage cost: the decrease your AGI, the decrease your month-to-month cost.

How AGI impacts scholar mortgage funds

The Division of Schooling provides numerous compensation plans to federal scholar mortgage debtors, together with 4 income-driven compensation plans. Every of those IDR plans makes use of a unique proportion of your discretionary revenue (starting from 10% to twenty%) and has a unique goalpost for accessing scholar mortgage forgiveness advantages (20 to 25 years).

Nevertheless, the entire IDR plans work the identical by way of utilizing your AGI and household dimension to find out your month-to-month cost.

The federal authorities makes use of your discretionary revenue to calculate your month-to-month cost. Discretionary revenue takes your earlier 12 months’s AGI and subtracts 150% of the federal poverty line for your loved ones dimension.

For instance, let’s say your AGI is $100,000 and you’ve got a household of 4. The 2021 poverty line for a four-person family is $26,500. Due to this fact, your discretionary revenue can be $60,250 for the 12 months.

From there, your discretionary revenue is multiplied by the suitable proportion based mostly on the IDR plan you’re enrolled in. That quantity is then divided by 12 to find out your remaining month-to-month cost quantity.

Utilizing the identical instance, let’s say you’re enrolled within the Revised Pay As You Earn (REPAYE) plan that makes use of 10% of your discretionary revenue. Your month-to-month cost can be about $502.

However what occurs in case you may strategically decrease your AGI by $15,000? Your new cost would drop to roughly $377 per thirty days.

Use our Revenue-Based mostly Compensation Calculator to shortly plug in your individual numbers and see how lowering your AGI may have an effect on your scholar mortgage cost.

Strategically scale back your AGI for decrease scholar mortgage funds

Lowering your AGI is the simplest strategy to decrease your federal scholar mortgage cost (the choice is to extend your loved ones dimension). Thankfully, there are a handful of methods that may make a serious dent in your AGI, whereas additionally benefiting you for the long-term.

Listed here are a number of methods to scale back your AGI through the use of “above-the-line” tax deductions to your benefit.

Enhance your pre-tax contributions to your retirement plan

Contributions made to a pre-tax retirement plan can decrease your AGI and assist set you up for retirement later down the street. This contains contributions made to a 401(ok), 403(b), 457, authorities pension fund or a conventional Particular person Retirement Account (IRA).

Observe: It doesn’t embody Roth IRA contributions since that sort of retirement plan includes after-tax {dollars}.

If in case you have entry to a retirement plan via work, you’ll be able to considerably decrease your AGI by maxing out your pre-tax contributions annually.

For instance, the 2021 most restrict for a 401(ok) or a 403(b) is $19,500.

However let’s say you’re a authorities worker with entry to each a 403(b) and a 457. You may max out each accounts at $19,500 per 12 months. This implies you’ll be able to shave off a complete of $39,000 out of your AGI by focusing in your retirement financial savings.

There’s additionally the choice to max out a conventional IRA at $6,000 per 12 months no matter whether or not your employer provides a retirement plan. Nevertheless, your deduction is perhaps restricted in case you or your partner are lined by a retirement plan at work. On this case, there are modified AGI limits to think about.

Remember the fact that your partner can contribute to their very own IRA or employer-sponsored retirement plan.

Contribute to a Well being Saving Account (HSA)

If in case you have a excessive deductible well being plan (HDHP), you may make tax-deductible contributions to an HSA for future medical bills. HSA accounts supply tax-deferred progress and tax-free withdrawals (when used on certified medical bills). However they will additionally prevent cash by lowering your AGI, and thereby, reducing your scholar mortgage cost.

For 2021, you’ll be able to contribute as much as $3,600 when you have self-only HDHP protection or as much as $7,200 for household HDHP protection.

Declare the coed mortgage curiosity deduction

Non-public and federal scholar mortgage debtors can deduct as much as $2,500 of paid curiosity on their certified scholar loans. Nevertheless, the coed mortgage curiosity deduction has modified adjusted gross revenue (MAGI) limits.

In case your MAGI is $85,000 or extra ($170,000 or extra for married submitting a joint return), then you definately received’t qualify for this tax deduction. Nevertheless, in case your MAGI is lower than these parameters, you is perhaps eligible to say the complete deduction or a partial deduction based mostly on phaseout pointers.

Use our Scholar Mortgage Curiosity Deduction Calculator to see how a lot you possibly can save in your taxes, together with how phaseout eligibility necessities will influence you.

Declare the schooling and charges deduction

In the event you, your partner or a dependent was enrolled in school the earlier 12 months, you would possibly be capable of declare the schooling and charges deduction for any paid certified schooling bills.

This deduction has MAGI limitations and a phaseout, as nicely. However when you have a MAGI lower than $80,000 (or lower than $160,000 if married submitting a joint return), then you definately is perhaps eligible to say a deduction as much as $4,000.

Observe: The way forward for this deduction is not sure. It was beforehand eradicated by the Tax Cuts and Jobs Act in 2017, however was retroactively renewed and prolonged via the 2020 tax 12 months.

Bills that aren’t included in AGI

As talked about earlier, some tax deductions decrease your total tax legal responsibility, however they received’t influence your AGI or your scholar mortgage cost. Nevertheless, it’s nonetheless useful to know potential deductions for:

  • Charitable contributions
  • Mortgage curiosity
  • State and native revenue, gross sales and property taxes
  • Medical prices

Have in mind these “below-the-line” deductions require you to itemize your tax return. Most individuals declare the usual deduction ($12,550 for single and $25,100 for married submitting collectively). But when your entire eligible mixed bills exceed the usual deduction, it can save you cash by monitoring and itemizing these deductions.

Plan forward on your taxes and scholar loans

If in case you have a considerable amount of federal scholar mortgage debt, then your taxes and scholar loans ought to go hand-in-hand.

That is particularly the case in case you’re pursuing Public Service Mortgage Forgiveness or total IDR forgiveness. Save as a lot cash on funds as potential, and obtain the most important forgiveness profit in the long run.

In the event you want tax prep assist that elements in your distinctive scholar mortgage state of affairs, we advocate utilizing Scholar Mortgage Tax Consultants. You’ll want to point out Scholar Mortgage Planner as your referral supply to obtain a free 30-minute seek the advice of and low cost.

Nevertheless, in case you want a long-term technique for paying off your scholar loans, our workforce of scholar debt specialists are right here for you. We’ll create a personalized compensation plan that can assist you maximize your funds by taking a look at all angles of your monetary, private and profession objectives.

Refinance scholar loans, get a bonus in 2021

1 Disclosures
$1,050 BONUS1 For 100k+. $300 bonus for 50k to 99k.1
VISIT LAUREL ROAD Variable 1.64-5.65percent1 Fastened 2.25-5.75percent1

2 Disclosures
$1,050 BONUS2 For 100k+. $300 bonus for 50k to 99k.2
VISIT COMMONBOND Variable 2.49-6.84%%2 Fastened 2.59-6.74percent2

3 Disclosures
$1,000 BONUS3  For 100k or extra. $200 for 50k to $99,9993
VISIT EARNEST Variable 1.88-5.64percent3 Fastened 2.44-5.79percent3

4 Disclosures
$1,000 BONUS4 For 100k+. $300 bonus for 50k to 99k.4
VISIT SPLASH Variable 1.88-6.15percent4 Fastened 2.44-6.62percent4

5 Disclosures
$1,275 BONUS5  For 150k+. Tiered 300 to 575 bonus for 50k to 149k.5
VISIT ELFI Variable 2.39-6.01percent5 Fastened 2.47-5.99percent5

6 Disclosures
$1,000 BONUS6 For $100k or extra. $200 for $50k to $99,9996
VISIT SOFI Variable 2.25-6.59percent6 Fastened 2.49-6.94percent6

7 Disclosures
$1,250 BONUS7  $350 for 50k to 100k7
VISIT CREDIBLE Variable 1.80-8.90percent7 Fastened 2.15-9.15percent7

Unsure what to do along with your scholar loans?

Take our 11 query quiz to get a personalised suggestion of whether or not you must pursue PSLF, IDR forgiveness, or refinancing (together with the one lender we expect may provide the finest fee).

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