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

If you’re in the military, or even employed for the government, your federal student loans are eligible for Public Service Loan Forgiveness. This means that after 120 payments, you can have the remainder forgiven. This is a better deal than the standard 10-year forgiveness plan, which requires only 10 years of payments. However, it is important to know where your payments are going if you are planning on taking advantage of this plan.

Your AGI is one of the most important numbers for figuring out how to reduce your student loan payments. If you’ve never heard the term AGI before, here’s a basic breakdown: your AGI is the sum of all of your “adjusted” income sources, such as your adjusted gross income, capital gains, interest, and nontaxable social security.

A main tenet of the Student Loan Planner blog is to help all readers become better educated about how to pay off their student loans faster. For one thing, that means understanding the basics of federal student loan programs and repayment options. But another critical component of financial literacy is understanding how your adjusted gross income (AGI) affects your monthly student loan payment.. Read more about adjusted gross income for student loan repayment and let us know what you think.

Your adjusted gross income (AGI) is used each year as a starting point to determine the total amount of your taxes. However, it is also an important factor in calculating federal student loan payments under an income-based repayment plan (IBP). There are a number of strategies to effectively reduce your AGI and therefore reduce both your tax bill and the amount of your student loan. Here’s how.

What is adjusted gross income?

Your AGI is essentially your total gross income for the year, after adjusting for certain tax deductions. Gross income lists all types of income earned during the year, including:

  • Wages,
  • Income from entrepreneurial activities,
  • Dividend,
  • Added values,
  • Retirement benefits,
  • And other forms of income.

Income adjustments also include certain tax deductions that cross the line, such as B. Interest on student loans and pension contributions. In simple terms, your AGI is calculated as follows: Total gross income – excessive deductions = AGI However, not all tax deductions are considered excessive. For example, deductions for health expenses and mortgage interest are considered basic deductions and can only be claimed if you file an individualized tax return (which most people don’t do because the standard deduction is now so high).

The itemized deduction ultimately reduces your taxable income, thus reducing your overall tax liability. However, they do not affect the calculation of your AGI. This is an important distinction to understand because your AGI is directly related to your federal student loan payment: the lower your AGI, the lower your monthly payment.

Effect of AGI on student loan payments

The Department of Education offers federal student loan borrowers a number of repayment plans, including four income-based repayment plans. Each of these IDR plans uses a different percentage of your discretionary income (10-20%) and has a different student loan forgiveness goal (20-25 years). However, all IDR plans work the same way because your AGI and family size are used to determine your monthly payment. The federal government uses your discretionary income to calculate your monthly payment.

To calculate free disposable income, take your AGI from the previous year and subtract 150% from the federal poverty level for your family size. For example, let’s say your AGI is $100,000 and you have a family of four. The poverty line for 2021 is $26,500 for a family of four. Your free disposable income would be $60,250 for the year. Your free disposable income is then multiplied by the appropriate percentage based on the IDR plan you are enrolled in. This figure is then divided by 12 to determine the final monthly payment.

In the same example, let’s assume you are enrolled in a REPAYE (Revised Pay As You Earn) plan that uses 10% of your discretionary income. Your monthly payment will be approximately $502. But what if you could strategically lower your AGI by $15,000? Your new payment will drop to about $377 per month. Use our income-based repayment calculator to quickly enter your own figures and see how your reduced AGI could affect your student loan repayments.

Strategically reduce your AGI to pay less on student loans

Lowering your AGI is the most effective way to reduce your federal student loan payments (the alternative is to increase your family size). Fortunately, there are several strategies that can significantly lower your AGI and still be beneficial in the long run. Here are some ways to lower your AGI by using the benefits of unclaimed tax deductions to your advantage.

Increase your pre-tax contributions to your retirement plan

Any pre-tax retirement contributions you make reduce your AGI and help you prepare for your future retirement. These can be contributions to a 401(k), 403(b), state retirement plan, or traditional IRA. Message: This does not include contributions to a Roth IRA, as this type of retirement plan uses after-tax dollars. If you have access to your employer’s 401(k) program, you can significantly reduce your AGI by making maximum contributions each year. In 2021, the ceiling is $19,500.

You also have the option of limiting your traditional IRA to $6,000 per year, whether or not your employer offers a retirement plan. That’s a total of $25,500 that you can save on your AGI by focusing on retirement savings. This number can be even higher if you are married, as your spouse can contribute to his or her own IRA or to an employer-sponsored retirement plan.

Health savings account (HSA) contribution

If you have a high-deductible health plan (HDHP), you can make tax-deductible contributions to an HSA for future medical expenses. HSAs offer tax-deferred growth and tax-free withdrawals (if used for qualified medical expenses). But they can also save you money by lowering your AGI, which means you pay less for your student loans. In 2021, you can contribute up to $3,600 if you have HDHP self-insurance or up to $7,200 for HDHP family coverage.

Interest deduction for student loans

Private and federal student loan borrowers can deduct up to $2500 of the interest paid on their qualified student loans. However, the interest deduction for student loans is subject to limits on adjusted gross income (AGI). If your MAGI is $85,000 or more ($170,000 or more for spouses filing jointly), you are not eligible for this tax credit. However, if your MAGI is below these parameters, you may be entitled to a full or partial deduction under the phase-out rules. Use our student loan interest deduction calculator to calculate how much you can save on your taxes, including the effect of differential deductions.

Request for deduction of tuition and fees

If you, your spouse, or a dependent attended an institution of higher education in the previous year, you may be able to claim a deduction for tuition and fees for eligible educational expenses. This trigger has both MAGI limits and a progressive reduction. However, if your MAGI is less than $80,000 (or less than $160,000 if you are married and filing jointly), you can claim a deduction of up to $4,000. Message: The future of this deduction is unknown. The law was previously repealed by the Tax Cuts and Jobs Act of 2017, but was retroactively extended and extended through fiscal year 2020.

Expenditure not included in AGI

As mentioned earlier, some tax deductions reduce your overall tax bill, but they do not affect your AGI or student loan repayment. Nevertheless, it is helpful to understand what deductions are available:

  • Charitable contributions
  • Interest for the mortgage
  • National and local taxes on income, sales and wealth
  • Medical expenses

Remember that you must itemize your tax return to take these deductions into account. Most people qualify for the standard deduction ($12,550 for singles and $25,100 for cohabiting couples). However, if all of your allowable expenses combined exceed the standard deduction, you can save money by tracking and itemizing these deductions.

Plan your taxes and student loans

If you have significant federal student loan debt, your taxes and student loans should go hand in hand. This is especially true if you are entitled to civilian service allowances or a general IDR allowance. Save as much money as possible on your payments and get the most out of your debt relief. If you need help preparing tax documents tailored to your unique student loan situation, we recommend Student Loan Tax Experts. Be sure to mention Student Loan Planner as a referral source to receive a free 30-minute consultation and discount.

However, if you need a long-term student loan repayment strategy, our team of student debt experts are here to help. We create a customized repayment plan to help you make the most of your finances by taking into account all aspects of your financial, personal and professional goals. A plan for a student loan Refinance your student loan and receive a bonus in 2021.

Frequently Asked Questions

How can I reduce my student loan AGI?

Figuring out how to reduce your student loan AGI is tough, especially if you’re already on a tight budget. You can reduce your payments by working more, but if you don’t have enough money to pay for basic living expenses, working more isn’t an option. However, there are some ways to lower your AGI, which can help you reduce your student loan payments. In this post, we’ll outline some strategies you can use to reduce your AGI. Today’s blog is a guest post from Chris Papadopoulos of Student Loan Planner.

Chris wanted to share his advice about how you can use your adjusted gross income (AGI) to reduce your monthly payments. That’s it for this week! Remember: you don’t need to limit yourself to the topic I picked and the blogs I suggested. If there’s a topic and blog you want to tackle, do it! Have a good week! And if you’re enjoying the blog so far, please consider subscribing to my blog or following me on  Twitter ,  Google+ , or Facebook

Do student loan payments affect AGI?

In the United States, student loans are a necessity for many students who wish to continue their education past high school. Student loans have many benefits, and the ability to defer payment until you are gainfully employed is one of them. While there has been much discussion of the consequences of student loans, there has been little discussion of how to lower student loan payments. This article will explain how to effectively start lowering your student loan payments with your adjusted gross income (AGI).

The Internal Revenue Service has provided a student loan interest deduction to those who have made student loan payments up to $2,500. This deduction can be claimed every year and is applicable to the full amount of interest paid during the previous year. You can claim this deduction regardless of whether you claim the standard deduction or itemized deductions. However, there are some limits and conditions that need to be satisfied before claiming this deduction.

How do I reduce my IBR?

Imagine you have a student loan. You are not satisfied with the interest rate you have been assigned. But you do not want to pay more than you are obliged. How do you lessen your student loan payments? Sometimes, it’s as easy as reducing your income. To illustrate this point, let’s say you have federal student loan debt with a 6.8% interest rate. You currently make $50,000 a year, have a family, and have been paying your loans on time for four years.

Upon your graduation, you took a job paying $55,000 a year. Your salary hasn’t changed since then, but your loan balance has grown to $80,000. If you have federal student loans, it’s likely that you’re on an income-based repayment (IBR) plan. An IBR is a type of income-driven repayment plan that adjusts your monthly loan payment according to your income and family size. Your monthly IBR payment is made up of two parts: a fixed amount (the 10% of your discretionary income that you pay for 20 or 25 years) and an amount that is capped at what you would pay each month on a standard 10-year repayment plan .


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