Parent Plus Loan Vs Private Loans: Which Option Offers Better Rates
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What Qualifies For The Deduction
Interest paid on a loan will typically qualify for the student loan interest deduction if the loan was taken out for the sole purpose of paying the qualified educational expenses for you, your spouse, or a dependent while attending an eligible school. Loans provided by relatives or employers dont qualify for the deduction.
Qualified educational expenses include:
- Room, board, and other living expenses
- Textbooks, supplies, and equipment
- Other necessary expenses like transportation
Colleges, universities, and vocational schools are eligible schools if they are approved to participate in a student aid program administered by the U.S. Department of Education.
Your Standard Deduction And Child Tax Credit Could Increase
Because itemized deductions are being nearly eliminated, the GOP has proposed other deductions to replace them.
The standard deduction would nearly double: from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples.
The child tax credit would increase from $1,000 to $1,600 and would include a $300 credit for each parent and non-child dependent . These credits would expire after 2022.
For a married couple with two children earning $60,000 per year, the proposed changes would reduce their tax liability from $1,608 to $472, according to The Wall Street Journal.
But experts argue the picture wouldnt be so rosy for every family.
Everyone is talking about doubling the standard deduction, but whats lost is that they are getting rid of personal exemptions, said Erb. For some middle-class families with children, doubling the standard deduction wont offset the loss of those exemptions. Additionally, the increased child tax credit might not offset the loss of exemptions for some families.
An increase in the standard deduction also will lead to fewer people itemizing their taxes which could lead to fewer charitable donations.
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Parent Plus Loan Tax Exemption
Did you know that any federal loan, including Parent Plus loans which are used to pay for postsecondary education costs, are eligible for tax exemptions? Qualified borrowers are allowed to deduct the loan interest. The maximum education loan interest deduction is $2,500.
There are conditions like income limits that apply to the education loan interest deduction. Consult your tax advisor for more details to see if you qualify.
Denied A Parent Plus Loan
If you are found to have adverse credit history, you may still be able to borrow from the Parent PLUS Loan program. You have two options: submit a successful extenuating circumstances appeal for an exceptional circumstance, or reapply with a cosigner who does not have an adverse credit history.
If you want to appeal the decision, you must submit a request to appeal the decision and provide information regarding your denial decision. If successful, you may be required to completed loan counseling prior to receiving the Parent PLUS loan funds.
If you would like to apply with a cosigner who does not have adverse credit, the cosigner would need to complete an endorser application.
Now, if neither of these options works for you, your denial of a Parent PLUS Loan would actually make your dependent undergraduate student eligible for independent undergraduate student Stafford loan limits. Meaning, they will have access to additional loan funds they can borrow under their name to help pay their own college costs.
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You Have Great Credit
To get your lowest student loan rates from private lenders, youll need to meet the following requirements:
- Good or excellent credit
- Solid credit report and repayment history
- Debt-to-income ratio of 30% or lower
If that sounds like you, then get started on your private student loan shopping. Youre likely to get some of your best student loan rates out there.
The most accurate way to find out if you could pay less with a private student loan is to request rate estimates. Lenders often provide rate checks before you apply for a parent student loan and use a soft credit check that wont hurt your score. You can compare these offers to Parent PLUS loans to find your best deal.
Federal Parent Plus Loan
Parents or step-parents of undergraduate dependent students can choose to utilize the Federal Parent PLUS loan to pay educational expenses not already covered by other financial aid. PLUS loans are not subsidized and parents are responsible for all interest that accrues on the loan from the day it is disbursed until the loan is paid-in-full. Any interest paid on the PLUS loan is tax deductible. Students must be enrolled in a minimum of 6 credits.
Interest Rates & Processing Fees:
- 5.30% interest rate for loans disbursed between July 1, 2020 and June 30, 2021
- 6.28% interest rate for loans disbursed between July 1, 2021 and June 30, 2022
- 4.228% of the amount borrowed is assessed as a processing fee by the federal government for loans disbursed between October 1, 2020 and September 30, 2022
Fees for the 2021-2022 academic year will be released by the federal government late this year.
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States With A Student Loan Tax Credit
Some states go above and beyond for their student loan borrowers by providing a student loan interest credit.
To understand howvaluable this is, you have to understand the difference between a tax deductionand a tax credit.
The actual cash value to you of a tax deduction is the amount of the deduction multiplied by your marginal tax rate. So, if your marginal tax rate is 10% and you receive a $500 deduction, the actual cash value to you of that credit is $50.
But the actual cashvalue to you of a tax credit is the amount of the credit itself: if you receivea $500 tax credit, the actual cash value to you of that credit is $500!
While rare, there are a few states that offer a student loan tax credit rather than a student loan deduction. Below we go over these states and the rules surrounding their credit.
Eligibility For The Student Loan Interest Deduction
You cant claim the student loan interest deduction if your modified adjusted gross income exceeds certain limits. For most people, your modified adjusted gross income is simply your adjusted gross income before any adjustment for student loan interest payments.
For the 2019 tax year, the modified adjusted gross income limits were:
- $85,000 if single, head of household, or qualifying widow
- $170,000 if married and filing a joint return
In addition to income limits, you cant claim the deduction if:
- Your parent or another relative claims you as a dependent on their own taxes
- You or your spouse are not legally responsible for repaying the loan
- Youre married and filing separate returns
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Tax Savings With The Student Loan Interest Deduction
With an average tax rate of about 15%, the average tax savings with the maximum student loan interest deduction are $375.
Depending on your situation, however, your savings could be more or less than that. Either way, it has the potential to save you hundreds of dollars if you owe taxes or increase your tax refund if you dont.
Theres no time limit for how long you can claim the deduction, which can be good news if your loan repayment term has been extended to 20, 25, or even 30 years.
What Counts As A Qualifying Student Loan
Not all student loans are eligible to take advantage of this interest tax write off.
In fact, the IRS makes it quite clear that qualified student loans are loans that were taken out solely to pay qualified higher education expenses, as defined in their Publication 970, and Form 1040 Instructions.
To save you the trouble of having to look up those documents and check out their information, heres the types of expenses that qualify:
- Tuition costs
If you still have other questions about student loan debt, then please feel free to ask them in the Comments section below.
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Who Qualifies For The Student Loan Interest Deduction
In order to qualify for the student loan interest deduction, there are a few criteria you need to meet.
For starters, the loan youâre paying must have been for you, your spouse or a dependent. You cannot claim the deduction if someone else can claim you as their dependent, even if youâre the one who made the loan payments.
You can claim the deduction if your filing status is single, head of household, married filing jointly, or qualifying widow. You cannot claim the deduction if you are married but filing separately.
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How much of the deduction you can claim, if you can claim anything, also depends on your income.
Not All Loans Are Eligible For The Student Loan Interest Deduction
The student loan interest deduction may be available to you if you meet certain key criteria. According to the IRS, student loan interest is tax deductible if:
- You took out the student loan for yourself, your spouse or any person who was a dependent at the time when you borrowed. The deduction is available for both federal loans and private loans.
- The loan was taken out to cover the costs of educational expenses during an academic year. You can only deduct interest if the student loan covered school-related expenses, including tuition or room and board. If you funded personal expenses not directly related to your education, like buying a car while in school, youre supposed to reduce your deduction.
- You were legally obligated to pay the interest on the student loan. If you pay on your childs student loan but arent obligated to pay the interest, you cant deduct it.
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How Does The Student Loan Interest Deduction Work
The student loan interest deduction is an above-the-line exclusion from income that you can use when filing your annual taxes with the Internal Revenue Service .
An above-the-line exclusion from income is also sometimes called an adjustment to income and it reduces the adjusted gross income on your federal income tax return. As a result, it also reduces your taxable income for the year.
All youve got to do to claim student loan interest deduction is add the total amount of eligible student loan interest on IRS Form 1040.
You dont have to itemize loan interest payments to claim the deduction but well get to specific eligibility requirements and how to claim the deduction in a minute.
You should be able to receive this tax deduction for any interest that you paid on qualified college loans during the tax year, up to a total of $2,500.
If you paid less than $2,500 in student loan interest, the amount of your deduction is based on the total amount you paid. For example, if you only paid $1,500 in interest for a given tax year, your deduction is $1,500.
That means your taxable income will be reduced by $1,500.
How Much Student Loan Interest Is Tax Deductible
We all know getting higher education is EXTREMELY expensive! Because of this, most Americans have to take out student loans just to pay for their tuition and basic living expenses. After graduating with student loan debt, many taxpayers question what education expenses are tax deductible and if student loans can be written off.
A tax deduction for student loan interest paid is available to most U.S. taxpayers, including both itemized and standard deduction takers. However, student loan interest deductions have specific eligibility requirements that Iâll discuss later in this post. First, letâs talk about the different types of student loans.
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Who You Can Claim As A Dependent
Individuals who you can claim as dependents for the student loan interest deduction are the same as who you can claim as dependents for the rest of your tax return. That can include children, parents, and other relatives.
Notably, you cannot claim someone as a dependent if they filed a joint return or if they had gross income of $4,150 or more in the tax year.
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There Are Income Limits
The student loan interest deduction phases out at higher incomes, so youll be ineligible to claim the deduction if you make too much money.
- If you make more than $85,000 as a single filer, you cant get the student loan interest deduction.
- If you make more than $170,000 if married, filing jointly, you arent eligible for the student loan interest deduction.
What You Cant Do For Parent Plus Loan Repayment
Unfortunately, there are a couple programs parent PLUS borrowers arent eligible for. Although they can work with other types of federal student loans, Pay As You Earn and Income Based Repayment cant help you with parent PLUS loans unless you consolidate first.
You also cant count on any kind of grace period. Some students can get up to 6 months of no payments after they graduate, but this doesnt apply to parent PLUS loans.
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What Do I Do With My 1098
You’ll have one 1098-E for each account listed on your Account Summary.
To file your taxes, you don’t need a physical copy of your 1098-E. Check with a tax advisor to determine how much of the interest paid on your student loans in the previous year is tax deductible. If you have more than one account, you’ll need to look at multiple statements and add the numbers together for your total deduction. Enter the amount from box 1 into the student loan interest deduction portion of your tax return.
If you want a physical copy of your 1098-E for your records, just print it out from our website. It’s as easy as that!
Should I Make Only Minimum Interest Payments So I Can Prolong My Eligibility
It would be financially inefficient to prolong your student loan payments just so you can take advantage of the tax deduction for a longer period of time especially when there are better ways to lower your tax liability, like contributing to retirement plans or saving for a childs college education.
You would save more money paying off student loans fast. The longer you have your loans, the more interest that accrues and the more you will end up repaying over the life of the loan.
In addition, the student loan tax deduction wont save you that much money. Unlike tax credits, which reduce your tax bill dollar for dollar, deductions reduce how much of your income is subject to taxes. For example, if you make $50,000 a year, the deduction will take your taxable income down to $47,500. It would be incorrect to think you would only have to pay $7,500 in taxes if youre initially required to pay $10,000.
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But Before I Explain The Rest Of The Details
Let me clue you in on something really important if youre facing significant financial problems because of your student loans, then you need to look into other options for finding both short-term and long-term financial relief.
trulyFor help with FEDERAL Student Loans:For help with PRIVATE Student Loans: