Don't Mess With Taxes

You made it through college. Congratulations! Now you've just got to repay that student loan. Photo by Muhammad Rizwan on Unsplash

More than 40 million former college students who have federal student loans must soon start repaying that debt. The financial obligation has been on hold since March 2020 as a way to help borrowers who encountered financial difficulties during the COVID-19 pandemic.

During these three and half years, the borrowers didn't have to pay their student loans. But that changes next month.

The first post-pause payment is due in October, which starts in just a few days. If you have a student loan, you probably already got a bill reminding you that your payments must resume, and alerting you to the specific due date.

If you haven't taken steps to get back in the loan payment routine, here are four tips. And since this is a tax blog, the last one is a reminder of a tax break that could offer some savings at tax filing time.

1. Head to StudentAid.gov. This special Department of Education web page will walk you through the payment resumption process. There are two key things you need to do as soon as possible.

First, update your contact information. A lot can and probably did happen during the years-long break in making student loan payments.

Second, do the same update on your loan servicer's website. If you're unsure who that is, there's a link at StudentAid.gov where your long in to find your servicer.

If you haven't checked on your loan account for a while, don't be surprised if your original loan holder is gone. Some of the pre-pandemic servicers are gone, and transferred the accounts they held to other servicers. Either way, you need to reacquaint yourself with your servicers or familiarize yourself with the new one.

2. Explore loan obligation options. This is the not-so-fun part. If your post-coronavirus job situation is not as good as before, what you now must start paying could be a problem.

In that case, you'll want to explore refinancing options. The Education Department's student loan simulator can help you calculate student loan payments and choose a loan repayment option that best meets your needs and goals.

Popular plans are those that fall into the income-driven repayment (IDR) category. These include —

• SAVE (saving on a valuable education) plan (formerly called REPAYE)
• PAYE (pay as you earn) plan
• IBR (income-based repayment) plan
• ICR (income-contingent repayment) plan

You can also use the student loan simulator to decide whether to consolidate your student loans.

Regardless of what the loan simulator's numbers show, one student finance expert says most borrowers should avoid refinancing into a private loan, even if it offers a lower interest rate.

"The reason I almost always discourage that action, despite the potential of a lower interest rate, is that federal student loans are unique in that they have a wide variety of safety nets if you should run into some financial trouble," Betsy Mayotte, president of the Institute of Student Loan Advisors, told the public radio program Texas Standard.

There's a forgiveness component baked into the federal loan plans that are based on your income, and even discharge of the debt if something really terrible happens, said Mayotte.

"You lose all of those safety nets if you refinance a federal loan into a private [one],” she added.

3. Get automated payment savings. Life is hectic enough already, and [re]adding a bill to the mix could make it worse. To make things easier, consider enrolling or re-enrolling in auto pay.

In addition to making sure you don't miss any payments, autopay will get you a 0.25 percent reduction of your loan's interest rate.

If you were participating in auto pay before the payment hiatus, you'll probably have to re-enroll.

4. Claim your student loan interest deduction. This is the promised tax tip.

Interest on the loans, whose accrual also had been on hold, resumed on Sept. 1. The good news is that you might be able to take a tax deduction for your student loan interest.

The tax break is an above-the-line deduction, which means you don’t have to itemize to claim it. Just enter the interest amount, up to a maximum of $2,500 a year, on your Form 1040 Schedule 1 (Part 2).

The interest write-off is available to higher education loans for your own studies, as well as those of your spouse or your dependent.

But there is an income limit.

For the 2023 tax year, your deduction phases out if you are single, head of household, or a qualifying widow(er) with modified adjusted gross income (MAGI) of $75,000 to $90,000. The income phaseout range for married joint filers is MAGI of $150,000 to $180,000.

I know $2,500 isn't a lot, and some loans' annual interest could exceed that. But with loan payments and interest just now restarting, the tax deduction should cover all or most of the amount for many taxpayers in higher education debt.

You also might find these items of interest:

• A quick lesson on 8 education tax breaks
• College financial aid via FAFSA is getting some tweaks
• 529 plan changes under SECURE 2.0 should boost retirement savings

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