Cut Your Taxes with Student Loans

Cut Your Taxes with Student Loans

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by David Gibson

They say taxes and death are the two things you can always count on. For college graduates, it is more like student loans and taxes. Statistics show that the vast majority of students graduate with heavy loan debt, which must be repaid.

While most new graduates vaguely recall cashing in that loan check every semester, reality sets in rather quickly when you receive that first loan repayment bill. You may panic a bit when considering repayment, but knowing how to manage those loans will help to ease the pain ever so slightly.

As if student loan repayment bills were not enough, there is a second rude introduction to the adult life. Yes, I am talking about taxes. How can they take so much?! Well, it can be a brutal awakening, but at least the government is going to give you a break.

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Aside from all the usual strategies involved with attempting to repay those loans, you must not forget about good old Uncle Sam. You see, your uncle wants to help you with those loans, which is why he has implemented an interesting tax strategy regarding the interest you pay off yearly.

Student loan payments are comprised of principal and interest. The interest you repay is a tax deduction you can use year after year while repaying your loans. That deduction is capped at twenty five hundred dollars, but that is still a lot.

In fact, the deduction can be so attractive that many recent graduates do not really show much interest in paying their loans off. This is a mistake since your student loan payments far exceed the tax deduction. Nonetheless, save the money you do not pay.

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If you are only paying the minimum on student loans, you should have extra cash around. Here is what you do with it. The first step is to put aside 12 paychecks worth of income as an emergency fund to cover your for any problems that arise.

Once this money has been accumulated, leave it alone. Do not be tempted to spend one dollar from that emergency fund. Next, start to pay off those credit cards. Did you know that most students have around $2,500 in credit card debt? It will take awhile to pay off that debt, but it must be done.

After you have an emergency fund built, and you have paid off those credit cards, you can then start to invest. While you cannot escape loans and taxes, you can thank your dear Uncle Sam for the hefty student loan interest deduction by claiming it each year on your taxes.

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