Author Topic: Graduate Subsidized Loans-pay off or get the tax deduction?  (Read 4126 times)

atiff606

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Graduate Subsidized Loans-pay off or get the tax deduction?
« on: September 12, 2013, 09:36:58 AM »
Hello everyone! I have a quick question about my graduate subsidized student loans. I will be graduating with a masters in business (hopefully worth the investment) soon and would like to know if it is smarter to pay off my student loans as quickly as possible or pay the minimum and immediately start aggressively saving up for a duplex so I can get out of renting. I really hate carrying debt but with the tax credit for student loan interest and the high the cost of rent, it seems like the best option would be to hold onto it.
« Last Edit: September 12, 2013, 10:00:19 AM by atiff606 »

Chris

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #1 on: September 12, 2013, 09:40:20 AM »
More information is needed. What is your expected rate of return on the duplex vs. renting? What is the interest rate and principal of your student loans?

Psychstache

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #2 on: September 12, 2013, 09:50:37 AM »
There are a lot of things to consider here, but I will just stick to what I know.

Justifying keeping student loans because of the tax deduction (not credit) is not a good one. The problem is that A) it is a deduction, not a credit, so you are getting back only a small portion depending on your marginal tax rate.

http://www.kiplinger.com/article/taxes/T054-C001-S001-tax-credit-vs-deduction.html

The other problem is that the deduction is capped at a much lower amount than the actual interest paid (last year it was 2500).

http://www.irs.gov/taxtopics/tc456.html

My actual example from last years taxes: I paid roughly $6,000 in SL interest in 2012. I was able to deduct $2500, which being in the 15% tax bracket saved me a grand total of.... $375 on my taxes. Paying a bank $6,000 in exchange for getting $375 from the government is not a good trade off imo.


atiff606

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #3 on: September 12, 2013, 09:52:55 AM »
The interest rate on my loans is 6.8% and I will have around $37, 000 total when I graduate. Interest has already started to accumulate. I am paying $600 in rent and duplexes in my neighborhood are selling for $150,000 with 5% APR on a 30 year mortgage. Two bedroom duplex units are being rented out at $800 a month.

Psychstache

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #4 on: September 12, 2013, 10:00:28 AM »
6.8% is a lot of interest.

Do you have a job lined up after graduation? What does your income look like? Is that going to change quickly after you graduate?


atiff606

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Re: Graduate Subsidized Loans-pay off or get the tax deduction?
« Reply #5 on: September 12, 2013, 10:05:57 AM »
I am currently working as a graduate assistant for the university so I am not able to pay anything at this time. I am expecting to earn around $65,000 a year after graduation.   

Stache In Training

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #6 on: September 12, 2013, 10:21:01 AM »
If you keep your expenses down, there's no reason that you can't save up for a down payment, and pay at least a little ahead on your student loans.  6.8% is high, so I'd definitely want that down sooner than later.  Since you're paying 200 less in rent than you could be, I'd pretend you're paying that extra 200 a month, in addition to your savings.  So put that 200 towards your student loans, and then keep saving for the duplex, or split it.  The numbers on the duplex, assuming you have a good interest rate looks like it would work out.  However if you're coming fresh out of college, you may not have a great credit score, and your interest rate may be higher than 5%. That alone will almost guarantee you'll be saving for a while.

This of course is all assuming you get a good paying job once out from school.  Also, are you sure you want to buy right away?  What makes you think you won't want to move in a few years? Or be offered a job across the country?

Also, make sure you keep an eye out for all paperwork from your student loans once graduating.  I was sent paperwork that was explaining the interest rate and everything.  And then I noticed that they sneakily said no response is required, but if you read on, you saw another line with something to the effect of: sign that you've read this and send it back to us, we'll lower your interest rate by half a percent (or something like that).  And since my subsidized loans were all split between years, I got a few of those, but not for every year.  But so all I had to do was sign my name, and I was able to take like 1.5% off the total rate.  That alone will take your monthly payment from 425.80 (total paid of 51095.52) to 397.89 (total 47746.86).  Hopefully they give you that offer.

Yes, that 425.80 is how much you'll be paying a month on your loans.  If you haven't figured that into the fray, I'd make sure you do.  As the duplex payment will be (depending on down payment) 700 - 750 a month.  So with no renter in the other half (which is very possible), you'll be on the hook for about 1175 every month. Just somethings to keep in mind when doing your math.

jrhampt

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Re: Graduate Subsidized Loans-pay off or get the tax credit?
« Reply #7 on: September 12, 2013, 10:38:46 AM »
There are a lot of things to consider here, but I will just stick to what I know.

Justifying keeping student loans because of the tax deduction (not credit) is not a good one. The problem is that A) it is a deduction, not a credit, so you are getting back only a small portion depending on your marginal tax rate.

http://www.kiplinger.com/article/taxes/T054-C001-S001-tax-credit-vs-deduction.html

The other problem is that the deduction is capped at a much lower amount than the actual interest paid (last year it was 2500).

http://www.irs.gov/taxtopics/tc456.html

My actual example from last years taxes: I paid roughly $6,000 in SL interest in 2012. I was able to deduct $2500, which being in the 15% tax bracket saved me a grand total of.... $375 on my taxes. Paying a bank $6,000 in exchange for getting $375 from the government is not a good trade off imo.

Also be aware that at a certain level of income you will no longer be eligible for this deduction.  Obviously this is not a concern now as a grad student, but it may be later.  Also, you say you hate debt, but you seem to want to delay paying off your student loans in favor of taking on even more debt (mortgage).  I would not rush to tie yourself up with a mortgage...there will be plenty of time for that.  Obviously if you have any higher interest debt than the student loans which is not tax deductible, I would prioritize paying that off first, but I would still want to pay off a 6.8% debt, unless you had specific plans to work for a nonprofit or something and get it forgiven.

StarryC

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Re: Graduate Subsidized Loans-pay off or get the tax deduction?
« Reply #8 on: September 12, 2013, 11:22:18 AM »

Also be aware that at a certain level of income you will no longer be eligible for this deduction. 

This is the biggest issue.  The phase out starts at $60,000 and ends at $75,000 so it isn't such a high level that you will never achieve it.  In fact, with a graduate degree, you should hope to achieve it within a year to five years at the longest. 

Really, the reason not to pay off student loans at 6.8% is if you don't care about debt and you expect you will be in debt for a long time, almost no matter what.  Then, paying off the student loans first is dumb because they are the most "flexible" with payment plans, forgiveness, deferment, and 25 year forgiveness. 

Mazzinator

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Re: Graduate Subsidized Loans-pay off or get the tax deduction?
« Reply #9 on: September 12, 2013, 11:58:44 AM »
Here's an idea.. You can put your fed loans on IBR repayment plan, because I assume now your income is very low, and the payments may end up being $0 or very little (at least for a year or two, until your income goes up) the payments are based on your AGI and the gov forgives some of the interest* There are IBR calculators online to give you an idea of your monthly payment.

http://studentaid.ed.gov/repay-loans/understand/plans/income-based/calculator

Compare that with the amount of interest you would be paying monthly otherwise, 6.8% is pretty high.

http://www.aie.org/managing-your-money/finance-tools/daily-interest-calculator.cfm

Also, according to the 2% rule, your duplex idea is not so hot. For $150k you should be getting more like $1500/month per door (or $3000/month total rent) I understand it would make your portion like $400/month but there are sooo many costs with owning a home, not to mention a rental property too! "With mowgai comes much responsibility"

Anyways, good luck!! And I feel your pain of SL debt!!!

*Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR.

Kira

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Re: Graduate Subsidized Loans-pay off or get the tax deduction?
« Reply #10 on: September 13, 2013, 08:54:17 PM »
Are you absolutely 100% sure that you are going to be staying in this city after you graduate?

I'd kind of lean towards buying the duplex.. since you will be occupying it, you can get a nice lower owner-occupied interest rate, which you can then (probably) keep when you move on to your next rental property.