Thursday, December 1, 2011

Big student debts and student debt forgiveness program

If you are working in an industry/position where you are eligible for student debt forgiveness program, all tax deferred accounts become even more important to you.

A lot of student debt repayment plans are income based. All the money you put towards tax differed accounts, are excluded from your adjusted income and your installment amount for student debt is based on your adjusted income. So it should be a good strategy to pay minimum towards your student debt in this situation.

Annual payments for a student debt are 15% of Annual Gross Income.

Let’s understand this with an example:

Let’s say you have massive student debt and 60,000 annual income.

Scenario A: were you are not putting anything into tax differed accounts.
If you don’t put anything into your tax deferred accounts, your annual payment for student debt would be 9,000. By not putting anything into tax differed accounts, you would pay 90,000 towards your student debt over ten years after which your dent is going to be forgiven.

Scenario B: where you are maximizing your tax differed accounts.
401k contribution: 16,500
HSA contribution: 1,200
Total contribution = 17,700
So your annual gross income would be: salary – total contribution = 60,000 - 17,700 = 42,300.
In this scenario your annual payment for student debt would be 6,349.
By doing so you will pay 63,490 over ten year period.

Comparison between two scenarios:
Difference between scenario A and scenario B = 27,000
That’s correct. You will save 27,000 if you maximize just 401k and HSA accounts.

Accounts like 401k, traditional IRA and HSA accounts are most common tax differed accounts.

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