Student Loans: Repayment vs. Deferral
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College is much more expensive today than it was in my university days. I attended UCLA for $608 per year and a California State University for $450 per year, including campus fees. My BA in accounting and MBA in international business were funded without a dime in student loans.
Today, those same colleges cost a fortune. For California residents, UCLA costs nearly $12,000 per academic year (not including summer school), and a California State University costs about $5,000 per year—plus books and supplies and other mandatory fees. Private colleges average nearly $28,000 a year, and often cost $50,000 or more per year, plus room and board.
If you’ve attended college in recent years, there you sit, with $100,000 or more of college debt pressing down on you. Sooner or later, you will need to pay that off. What are your options? What are the tax ramifications?
Option 1: Make student loan payments now. Look at your various categories of debt—student loans, mortgage, credit cards, vehicle loan, etc. The main factors to consider when you pay down debt are:
If you have the money to pay down debt, you may be better off paying down credit cards and other nondeductible loans than your student loans.
Option 2: Request deferrals. Sallie Mae’s variable rates range from 2.75 to 10.75 percent. If you’re facing a higher interest rate, you’re better off paying that loan down quickly. High interest rates increase the total balance due more rapidly than you may realize. Deferring for five years can turn a $50,000 loan with 8 percent interest into nearly $75,000. The IRS limits deductions for student loan interest to $2,500 per year.
Option 3: Refinance the loans. If your student loan rates are high, perhaps it’s time to look for better rates. Interest rates are at their lowest levels in nearly a century. It’s worth trying to get better rates on all your debt right now.
If you consolidate your student loans into a mortgage or personal loan, you will lose the tax deduction for the student loan interest. However, that lost tax attribute will be more than offset by these advantages:
Or, Get Your Student Loans Forgiven—Tax-Free!
Explore the opportunities in the student loan repayment assistance program. Perhaps you can get the loans reduced or forgiven by working in areas of the country where your skills are urgently needed. Not only will you pay off your loans, but you’ll also have a memorable adventure.
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