How Much of My Student Loans Should I Pay Down Before the End of the Year?

Debt young independent woman, sorting out monthly financials credit card bills and rent

The New Year is almost here! When the end of December finally rolls around, you’ll look back at your year and hopefully, feel like you’ve accomplished something significant – like paying down your student loan debt. But beyond that sense of satisfaction, does it really matter how much of your student loans you pay back before the end of the year?

It depends. To start, consider…

What Are the Details of Your Student Debt?

Every person’s financial situation is different. To understand the best course of action for your debt repayment, you need to know the details of your debt. Start by making a list of your outstanding loan balances, monthly minimum payments and the interest rates for each.  

If you have student loans with a high-interest rate, (think six percent or more), your debt is likely to cost you more than you might earn by investing extra payments. In which case, paying off your high-interest debt as quickly as possible might be your best bet.

If you have lower interest debt, it might make sense to stick to making minimum payments on your loans while investing in vehicles like your retirement account to maximize your returns.

Can You Deduct Your Student Loan Interest?

You may be able to deduct up to $2,500 in student loan interest on your tax return.

But there are a couple of caveats.

First, you will need to know your income, adjusted gross income and your student loan payment history for the year. In order to qualify for the full deduction, you need to be making less than $65,000 as a single filer, or less than $135,000 if you’re married filing jointly.  The IRS has a quick quiz that can help you determine if you qualify.

Note, if you have refinanced your student loan for more than the original amount and used the excess for anything other than educational purposes, you won’t be able to deduct the student loan interest.

Are You in a Position to Pay Off More of Your Student Loans Right Now?

Take a look at your current monthly expenses and what you have set aside in an emergency fund.

If you’re living paycheck to paycheck and don’t have an emergency fund, be wary of going all in on paying off your student loans.

You’ll need some emergency cash set aside for unexpected expenses to help avoid taking on high-interest credit card debt if and when something happens, like a medical emergency or your car breaking down, (and trust me, something always happens).

You Should Always Be Making (at least) the Minimum Payments

In most cases, student loans cannot be discharged in bankruptcy. And ignoring them will only hurt your credit and balloon your balance with added fees and interest. Avoid delinquency and long-term money regrets by making on-time payments now!

Go Ahead and Pay ‘em Down!

Once you’ve considered all of the factors above, you can decide how aggressively you want to pay down your remaining student loan debt. If what you really need is a little more motivation to help you follow through, imagine what your life will be like once you become debt free.

Imagine how you’ll feel and how your life might actually change. Will you be able to finally take that trip you’ve been planning or apply for the mortgage on your first home or just be able to sleep better at night?

When you start to lose focus and purpose while working through your debt pay off journey, remember to reconnect with those things – all the things you stand to gain once you become debt free and the feelings of achieving them!

This blog post does not constitute, and should not be considered a substitute for legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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