Student Loans and Taxes

[qtkitty]

My mom has tried to tell me that most of my tax refunds are coming from my student loans so I should not try hard to pay them off. I am thinking this is not true.

However out of curiousity I wonder .. is it better to pay them off quicker or not.

I have my loans with Sallie Mae which supposedly now you can not pay off the principal you would have to pay all of the interest before you paid on the principal. Which to me makes me think I will be paying the same amount back no matter if I pay it off faster.

So is it better to hurry and pay it down or just keep going as I am making monthly payments?

[Contrary Housewife]

A loan is a loan and as long as they are charging you interest you are loosing money.

The amount of interest you pay each year is tax deductible, it comes off however much income you made that would otherwise be taxable. However, unless you have an amazingly large loan debt you aren't getting much tax refund benefit from it.

You are better off paying off the loan ASAP. The longer you keep it, the more interest they will charge you every month. Yes, they apply payments to interest they have already charged you, so you need to get that knocked down to principal only and get the principal down so the monthly interest charges get smaller too.

Clear as mud?

[Virginia Gentleman]

Your mom is not giving you good advice. It's very unlikely that you're getting as high an interest rate on your cash as you're paying on your loans...and even if you were, the security and stability of being debt-free cannot be underestimated. Roll up your sleeves, and knock the loans out as quickly as possible!

[mndtrp]

She probably belongs to the group that believes in "good" and "bad" debt. While I guess there are forms of "better" debt, which student loans and mortgages could fall into, any interest earning debt is "bad".

Yes, you can deduct the interest payments from your taxes, which will inflate your return. Depending on how you look at it, this essentially gives you a lower interest rate, which should be taken into account if you have multiple debts to pay off. However, if you don't have other debts to pay off, then there is no reason to hold on to your student loans simply to get the interest deduction.

Let's say you get 1/3 of the interest you deduct back in the form of a tax return. For simplicities sake, you pay $1,000 a year in interest. You claim this on your taxes, you get an extra $333 back. That's cool, but you still lost $667 to the lender. It's illogical to give away 2/3 of your money, simply to get 1/3 back later.

My wife came into our marriage with a decent amount of student loan debt, about half with Sallie Mae. Sallie Mae is incompetent, and does whatever they want with your money. My wife had a billing group, which held three different loans with different interest rates. What you said is accurate, they won't apply a cent to the principal until the interest is paid off. Well, Sallie Mae was paying down the smallest loan with the lowest interest rate, and not applying anything to the other loans. After a certain amount of time that you don't pay anything on the interest, I'm not sure how long off the top of my head, Sallie Mae considers the interest as Capitalized Interest, and rolls it into the principal. You then get to pay interest on what was originally interest. Smart for Sallie Mae, terrible for the people with the loans.

Even if your loans had no interest whatsoever, I would get rid of Sallie Mae simply because they are relatively incompetent, and do their absolute best in getting as much money as possible from you.

[Greebo]

Lets just say for a moment that your tax refund *is* coming from your student loan payments.

So you pay $1,000 to the student loan and in return you don't get taxed on $1,000 of your income, which means you don't PAY $250 to the government.

$1000 to save $250.

What a bargain.

[kita]

I have my loans with Sallie Mae which supposedly now you can not pay off the principal you would have to pay all of the interest before you paid on the principal. Which to me makes me think I will be paying the same amount back no matter if I pay it off faster.

So is it better to hurry and pay it down or just keep going as I am making monthly payments?

I have been paying down Sallie Mae for the last few months. I don't have any problem with it. Yes, when you make an extra payment the interest that is due that month is paid first and then the principal. But then when your regular payment is applied there is less interest to for it to pay so IT pays more principal than usual. They have been moving my due date out as well but I have (for the most part) ignored that, continued to make regular payments AND extras.
I will say that, while I haven't used it, in my situation I have been glad to have my due date moved. I work "per diem" and I have no hours promised. When work calls it can be more hours or a reduction. I am hoping to have Sallie paid soon so that absolute min. payment will go away.

[happymomof4]

The interest on Sallie Mae loans is way to high. You should look into putting all your loans with a bank and better interest rate. You could pay off your debt much quicker.

[qtkitty]

I have been paying more than required which is why I have paid off as much of the loan as I have. I believe my mom was worried that I would sink all my money into paying it down. Which would not be logical since I have a 11 yr old car that I have owned for 10 of those years. I am working on a car fund and paying down the student loans ( I hope that my car will last til I have paid off my student loans, so then the same amount will be going out * crosses my fingers * ) If I work harder on paying off those loans I believe with in the next 5 years they will be gone

[Anna43]

You are 100% right on this and you mom is mistaken. Its helpful that you can take the student loan interest off your taxes if you have enough deductions to do so. The same is true with mortgage interest. However, being debt free and not paying interest is much much better.