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You’ve probably seen or heard the phrase ‘student loan crisis’ in the news recently, along with a lot of discussion about whether all or a portion of federal student loans should be forgiven. It’s no surprise student loans have become a popular topic, as the total amount owed by the American public has soared in recent years.

How Much Debt is Out There?

According to a recent Forbes report, over 55% of current students take out loans to finance at least a portion of their education expenses. The majority of recent graduates with student loans finish school owing between $10,000 and $40,000. Over 7% of borrowers now owe $100,000 or more. With an average interest rate approaching 6% and an average monthly payment of $460, many borrowers struggle to find wages to support their minimum student loan payments after graduation. And while most loans are designed to be repaid on a ten-year term, in reality the average payoff now exceeds 20 years due to forbearances and income-based repayment plans.

Unfortunately, repaying student loans doesn’t get much help from the the tax code. Currently, you can deduct a maximum of $2,500 of student loan interest each year. However, due to income thresholds you may not be able to take advantage of that deduction. In 2022, the student loan interest deduction phaseout begins when adjusted gross income exceeds $70,000 for single filers and $145,000 for married filing jointly. It’s completely eliminated when adjusted gross income exceeds $85,000 and $170,000, respectively. No deduction is available for married taxpayers filing separately.

Like other borrowers, you might have counted on the Public Student Loan Forgiveness Program. This was designed to forgive remaining balances of qualifying debt after 10 years of timely payments. However, qualification for this program has been extremely difficult to attain and approximately 98% of applicants have had their loan forgiveness requests denied because the terms and conditions had not been met by the applicant.

What are the Alternatives?

If you or a family member are facing college costs in the near future, you may be asking what you can do to avoid or reduce the amount of debt needed to pay for school. In a previous newsletter article, we discussed using 529 Plans to start saving money for college costs. We also explained how to take advantage of the American Opportunity and Lifetime Learning Tax Credits that are available for many taxpayers. In addition to these options, you may want to consider the following ways to reduce higher education costs:

  • Complete the FAFSA to determine eligibility for grants and other debt-free sources of financial aid.
  • Apply for any available scholarships. There are many online resources designed to help you search for scholarships.
  • Take advantage of high school classes offering dual college credits, which are often significantly less expensive per credit hour.
  • Consider enrolling in less expensive community or junior colleges for some of the core undergraduate classes that may be required for your degree.
  • Review the costs to attend in-state, public institutions vs more expensive out-of-state or private institutions.
  • Compare costs to live at home or off-campus, which is often less expensive than the room and board options offered by schools.

College is expensive, and no one likes being saddled with heavy debt at the beginning of their career. Therefore, it makes sense to avoid student loans when possible.