Almost two years ago, I joined Will Boyd on the Breaking Student Debt Podcast. On the podcast, we discussed the similarities and differences between the student loan crisis and mortgage crisis. Since that podcast, I’ve been asked numerous times what actions should be taken to solve the student loan crisis.
This article discusses 3 solutions to the student loan crisis that I believe can make a major difference. These are solutions Congress can implement immediately if they desired. I doubt Congress actually will do so because it would mean more money in your pocket and less in the governments’ but we can always hope.
If you want to check out the most up-to-date stats on student loans check out this article by Forbes.
- Student Loan Crisis Solution #1: Interest Deduction
- Student Loan Crisis Solution #2: Pre-Tax Employer Contribution
- The Biggest Solution For The Student Loan Crisis: Social Security (#3)
Student Loan Crisis Solution #1: Interest Deduction
Currently, the student loan interest deduction for tax purposes is capped at $2,500 and phases out at various levels of income. Phasing out simply means once you make a certain amount of money you can no longer deduct any student loan interest for tax purposes.
What If we were allowed to deduct 100% of the amount of interest paid during the year on our student loans? Let’s see how much of a difference this would make.
The average individual managing and eliminating their student loans with FitBUX has $145,000 in student loans at a 6.3% interest rate. That equates to about $8,800 of interest paid in the first year.
Let’s say you are in the 20% tax bracket, you would save $1,760 per year if you could deduct 100% of the interest from your taxes. If you used that money to make prepayments on your student loans, you would have your loans repaid a full year earlier!
Student Loan Crisis Solution #2: Pre-Tax Employer Contribution
Recently, Congress introduced a bill that would have major repercussions. The bill would allow employers to contribute $5,250 in tax-free money to pay their employees’ student loans.
Currently, if your company pays anything to your student loans, you pay taxes on the amount at the same rate as your taxable income. If this bill goes through, that means you would save another $1,050 in taxes if you are in the 20% tax bracket.
The Biggest Solution For The Student Loan Crisis: Social Security
It is no secret that Social Security is failing and is a horrible investment for the younger generation. Between your contribution and your employer’s contribution, about 13% of your gross income goes to fund social security.
The idea is if you have student loans, you could elect to contribute the 13% to social security or use those funds to pay off your student loans.
For context, the average new grad on FitBUX’s platform makes $78,000 per year. That is $10,140 extra that could be used to pay off loans, EVERY YEAR!
Each of these ideas would be extremely beneficial to student loan borrowers. However, it would mean less money in the government’s pockets so we’ll see if they get passed.
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