“My student loans cost me a fortune.”
“My loan payments are higher than my rent.”
“I’m never going to be able to pay off my loans.”
If any of these phrases sound familiar to you, you’re certainly not alone. Over 44 million people have student loan debt, bringing the national total to over $1.5 trillion dollars. When you’re struggling to make ends meet each month, paying off your loans may sound like an impossible pipe dream.
What if there was a way to save thousands on your loans? That sounds too good to be true, right? But it’s real. And all it takes is your tax refund.
Your tax refund
While no one enjoys doing their taxes, millions of people look forward to tax season because they anticipate a large windfall: their tax refund.
When you do your taxes, you calculate how much you’ve paid toward federal and state taxes throughout the year. If you overpaid — or if you qualify for significant tax credits or deductions — you’ll get a refund, meaning you’ll get a check that you can deposit into your bank account.
Your tax refund can be a significant amount of money. According to the Internal Revenue Service (IRS), the average tax refund in 2018 was $2,035. For many, that’s a month’s salary.
Getting that much money back can be exciting. You may start dreaming of splurging on a big-screen television, a new computer, or maybe even a vacation.
But before you spend your tax refund, think about how to make it work harder for you. If used wisely, your tax refund can help you save thousands.
Using your refund to make a lump sum payment
While vacations and new stuff may sound tempting, your loan will go a lot further if you use it to pay down your student loan debt. By using it to make a big, lump sum payment, you can cut down on how much you’ll pay in interest and even get out of debt sooner.
You might be thinking that $2,000 isn’t enough to make a dent in your loans. When you have a large loan balance, it’s easy to feel discouraged. But even a small amount of money can make a great impact.
For example, let’s say you had $35,000 in student loans at 6% interest, with a minimum monthly payment of $383. If you only made the minimum payments, over the course of ten years, you’d repay a total of $46,879. Interest charges would cost you over $11,000.
But let’s say you received a tax refund of $2,035. If you made a lump sum payment on your student loans, you’d get out of debt a whole nine months ahead of schedule. And, you’d repay just $45,249. Using your tax refund to pay off a chunk of your loans would help you save over $1,600.
Even if your refund is smaller than the average amount, using it to pay off your loans can still be helpful. It can reduce your repayment term and cut down on the amount of interest you pay over time.
And, if you use your refund to pay off some of your loans every year, you can knock years off your repayment term and save thousands of dollars.
Adjusting your withholding
Of course, your tax refund isn’t really free money. You’ve been paying taxes all year long; it’s just the excess that you’ve paid. If you’re struggling to make ends meet each month and get a tax refund, you can help give yourself more breathing room by adjusting your tax withholdings.
When you fill out your W-2 form, adjust your allowances so you take less out of your paycheck each month. The goal is to take out just enough to cover your tax bill, but not so much to get a tax refund. If you use this approach and adjust your withholdings, you’ll have more money in your paycheck each month. You can use that extra money to make additional payments on your loans each month, helping you slash away at the principal.
This strategy works if you are focused and dedicated on repaying your loans as quickly as possible. If you’re afraid you’ll be tempted to skip making those extra payments, waiting for the windfall of a tax refund may be a better idea for you.
Tackling your student loans
When you’re struggling with student loan debt, paying off your loans or even making progress can sound impossible. Your tax refund gives you a unique opportunity each year to cut down on how much you owe, helping you save hundreds or even thousands over the length of your loan.
If you need help managing your loans, sign up for Pillar to get personalized advice and recommendations.