Our rule of thumb here is to recommend that you pay off your student loans as quickly as possible and not let them linger. But there are a few instances where this advice may not be as applicable. If you are working as a public servant, teacher or in another role that makes you eligible for student loan forgiveness after a certain period of time, there are some strategies you can deploy to decrease what you pay in and maximize this valuable job benefit.
For most forgiveness or cancellation programs owing to your job, you will have to serve between 5-10 years in the role while making “qualifying” student loan payments. It’s the “qualifying” part that’s the kicker. Qualifying student loan payments are those made under a standard 10 year plan, income based repayment, income contingent repayment or a pay as you earn plan. Payments made under extended repayment plans will not count!
Because you are no doubt raking in a lower salary as a public servant than you would be in the private sector, it makes sense to make the most of this benefit. One of the best ways to do that is to lower the income that is considered as disposable for purposes of calculating income based repayment and other discounted payment plans.
What’s AGI and Why It Matters
For any of the income contingent plans, what counts is not your gross pay or even your take-home pay, but your Adjusted Gross Income (AGI) – this is your income that is subject to income taxes. When you request to be changed to an income contingent payment plan (and FYI this is for federal loans only) you’ll be asked to supply your AGI from your most recent tax return (usually the 1040). This is not the income on your W2!
What you want is the lowest possible AGI (as long as you are on the right side of the tax code) in order to minimize your student loan payments. Money invested in your 401(k) lowers your AGI, so one strategy is to ramp up the amount you invest in your retirement account. Particularly if your company matches funds, you should increase your deductions up to the amount that will take full advantage of your employer match.
What Other Factors Lower AGI?
Itemized deductions are a great way to lower your AGI. If you’re lazy and just put down the standard deduction, think again. You may come out better with an itemized deduction. Be sure to include all your charitable contributions (think of all the neighbor kids that fundraise on your doorstep – that money counts). Medical expenses, home office expenses and a litany of other expenses can total up to a tidy deduction that exceeds your standard deduction and will further lower your AGI.
Student loan interest will lower your AGI. How’s that for a catch-22? What’s interesting is that because you are working to lower your payments, all of what you pay in may likely be pure interest and you’ll be able to put that towards lowering your AGI. Other AGI factors include car registration taxes, state taxes, mortgage interest, union dues, uniform costs, non-reimbursed business expenses, tax preparation fees and a host of other items that can add up to a lower AGI and lower student loan payment.
How Do I Figure This All Out?
Simply, when it comes to AGI, don’t try to figure it out unless you’re a CPA. Take your taxes to a pro and tell them you want to minimize your AGI and let them sort out your receipts and tell you what’s legally permissible. If you think student loan collectors are bad, you don’t want to deal with the IRS if you overstep the boundaries…
Once your return is prepared by a tax pro, you can use that to apply for an income based or contingent plan. You’ll have all of the information you need with your tax return and loan information in hand. If all goes well, you’ll get a lowered student loan payment and will remit that for 5-10 years and then have the remainder forgiven or cancelled (depending on the program you’re eligible for).
Is There a Catch?
Come on… There’s always a catch. Know this: if you opt for the minimal payment plan to take best advantage of public service (or another program) forgiveness, you have to stay on the job. If you walk away before your loans are wiped out, you’re going to be in a mess – you’ll possibly end up with a higher loan balance than when you started. So only take these steps if you know for sure that you’re sticking with public service!
If you think there’s a chance you may opt for a private sector job before your 5-10 year forgiveness window elapses, best to take the pay ASAP approach to your student debt. If you’re a teacher, back to school can mean more than shopping for supplies – this year it could mean a lower loan payment and less financial stress!
If you’re not sure how much you owe or want to see all your debt in one easy interface, try Tuition.io’s free student loan tool today! Also, check out these other recent blog posts on public loan forgiveness and student loan debt: