It’s always nice when we can report good news about student loans and a recently proposed Michigan law would certainly make life easier on its resident borrowers! The bill is aimed at fighting against “brain drain” – when Michigan college grads take their degrees and leave the state – although sponsoring Representative Andy Schor (D-Lansing) uses the more elegant term of “talent retention.” House Bill 4182 was introduced to the newly formed Michigan Competitiveness Committee and is now under review.
Schor says, “We have some of the best colleges and universities in the world, but people get educated here and then leave for Chicago or San Francisco or someplace else. We need to keep them in Michigan, and we need to keep them in our cities.” And his proposed solution is to offer a tax credit to offset student loan payments to incent degree holders to stay put!
House Bill 4182 Details
To qualify, you must graduate with a Bachelor’s degree from a Michigan college or university. And here’s what you get and the caveats:
1) You get a state income tax credit equal to half of your total annual payments on state or federal student loans.
2) Tax credit cannot exceed 20% of the average yearly tuition for Michigan universities.
3) You must provide proof of residency and employment in the state.
4) You may be asked to provide proof of student loan payments made.
How Rep. Andy Schor’s Plan Would Work
With tuition at University of Michigan now set at $14,664, the 20% cap would max your annual tax credit at $2,932. Doing some backwards math, if you’re paying $490 per month ($5,880 annually) your 50% tax credit would be roughly $2,940 (capped at $2,932).
If you’re wondering how much student loan debt is covered by a payment of that size – here’s the numbers on that: $42,000 student loan balance over 10 years at 6.8% gives you monthly payments of $483. And with most Michigan grads carrying $27,000 in average loan debt, this is a good deal and would easily accommodate the average debt load. Michigan has the 12th highest student loan debts in the US.
With one of the highest unemployment rates in the US – Michigan is at 8.4% as of May 2013 – it’s no surprise that grads may look elsewhere for work. For those that choose to stay, this can be a great opportunity to eradicate student debt!
How to Maximize This Benefit (If It Passes…)
Here’s our recommendation if this law passes on how grads can make best use of this money. If approved, the law will go into effect as of January 1, 2013, so all of your student loan payments for this calendar year would be eligible! Because it is a tax credit, it applies directly to your tax bill and if you have enough in-state income tax withholdings to cover your tax liability, the full amount of the credit can be refunded to you!
So for example, if you are a typical Michigan grad with $27,000 in debt at 6.8% interest, you’ll have a monthly payment near $310. Your annual installment payments will total $3,720 and the 50% credit would equal $1,860. If that amount is refunded to you, consider these two strategies:
1) Use the $1,860 to pay off high interest credit card debt. If you don’t have any of that, you can make a lump sum payment on your mortgage. If you have no charge card debt or a house note, consider increasing your 401(k) contributions by this amount and use the cash in hand to make up for the lower take home pay. With this method, you will get the full $1,860 each year until your loans are exhausted.
2) Invest the $1,860 into a debt avalanche program to fast-track your student loans. You continue to pay your $310 per month plus put the tax credit refund each year toward your loan balance as a lump sum payment. In 2014, you apply the $1,860 to your loan principal and then the next year, you’ll get $2,790 in a tax credit because of the additional payment. Apply the larger tax credit again to your principal. Your 2015 benefit would cap at $2,950 from there on out. By applying the maximum credit received back each year, your loans would be fully extinguished by mid-2018 assuming each year’s state tax refund amount for the credit was applied when received by mid-year. Using this method and maxing out the available tax credit – you could be free of student loans in just a few years!
We encourage the Michigan legislature to pass this bill! This could be a win-win for grads and the state. If you’re a resident of Michigan and support this bill, contact your Representative to encourage them to vote yes on House Bill 4182! If you’re feeling really energetic, maybe start a t-shirt campaign to draw attention to this important bill and get out and get some media attention for your cause!
No matter where you live, you can keep an eye on your loans with Tuition.io’s free student loan tool. Track your balances, see pay off dates, repayment plans and more! Also please enjoy these other recent blogs on managing your student loan debt: