Buried In Student Loan Payments? Here’s How to Dig Yourself Out

As you throw your graduation cap in the air, the last thing you think about is student loan payments. Unfortunately, college graduates are forced to consider it.

Americans collectively owe $1.2 trillion in student debt. Furthermore, the Institute for College Access & Success reports that seniors leave college with an average $28,950 in debt.

How Student Loan Repayment Works

The income-based repayment plans offered by the U.S. Government for student loans are based around your family size and your Adjusted Gross Income, or AGI. Setting money aside in tax advantaged accounts is a legal way of reducing your AGI and, in turn, your loan repayments.

Paying back your monthly student loan payments can be a financial burden, especially when you have other bills due at the same time. But it is inevitable. Luckily there are ways to lessen the immediate financial burden. Here are some tips on decreasing your AGI:

1. Maximize Your Retirement Plan Contributions

Retirement savings plan contributions can reduce your AGI and your overall taxable income. One strategy is using a 401(k), a retirement saving plan established by an employer. With a 401(k) you can contribute up to $18,000 in 2016 ($24,000 if you are 50 or older by the end of the year). A traditional IRA provides similar tax advantages to those without access to a 401(k). Retirement contributions are generally limited to $5,500 ($6,500 if you are 50 or older). The contribution limit may be reduced if you or your spouse are covered by a 401(k) at work. This IRS resource offers invaluable tips on this topic.

2. Maximize Health Savings Accounts

Sock away pre-tax dollars, or money that is not subject to income tax, through a Health Savings Account (HSA). HSAs are gaining in popularity as health care costs rise and as more employers have shifted more of the cost of health insurance to employees. HSAs can be used to pay out of pocket medical costs, copays and prescription costs. In 2016 the annual limit on deductible contributions is $3,350 for individuals with self-only coverage and $6,750 for family coverage. If you have a qualifying high-deductible health plan and you know your medical expenses add up each year, why not use an HSA to lower your AGI and help you pay your bills.

3. Maximize Health and Dependent Care Flex Spending Accounts

If you don’t qualify for an HSA, consider contributing to an employer-sponsored health flexible spending account (FSA). Also, if you pay for daycare so that you can work, you may benefit from an employer-sponsored dependent care FSA. Both types of FSAs allow you to set aside and use tax-free income to pay for specific types of expenses like doctor’s appointments or daycare. One caution about FSAs is their “use it or lose it” component. If you don’t spend your contributions by the end of the year you forfeit unused funds. So if you know you will incur a certain amount of medical expenses or daycare expenses during the year, contributing to an FSA both reduces your AGI and helps you pay these expenses.

If your student loan bills have become overwhelming, these simple strategies will help you decrease your AGI and potentially lower your monthly student loan payments.

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