Early drafts of the Trump Tax Plan called for the student loan interest deduction to be eliminated. Fortunately, due to the efforts of many concerned citizens, the student loan interest deduction survived the chopping block.
The bill doesn’t make any changes to student loan policy in the US, but due to the nature of the sweeping tax reform, it does present some opportunities for savvy borrowers.
Don’t Get Used to the Tax Cuts
For individuals, the tax cuts expire in 2025. While this may seem like a long way away, the most prudent financial planning has to assume that the tax break is temporary.
Student loan borrowers would be wise to direct the tax savings towards aggressively paying down their student debt.
A household earning between $50,000 and $75,000 is expected to save $870 per year on the new tax plan. Using that money towards student loans may not be sexy, but it can make a lasting difference on your student debt. Not only does that extra $870 lower your principal balance, but it also means that your balance will generate less interest each month. By spending less on interest each monthly regular payments reduce the principal balance even more. In this manner, applying the savings to student loans can accelerate your debt repayment, even if the tax breaks expire.
If you never get used to the tax cut, you will not be hurt by any future tax hike. It is the rare opportunity to aggressively attack your student loans without making any changes to your lifestyle.
Watch Out for Refinance Opportunities
The headline to the tax bill was the massive cut for corporations, dropping the corporate tax rate from 35% to 21%.
The private student loan refinance marketplace is a fairly young industry with several companies getting started in just the past few years. We are currently tracking 16 different lenders offering refinancing services.
When companies compete for market share in a new industry, they often operate on very narrow margins to get an edge. The tax cuts could lead to better interest rate offers as we enter next year. The flip side is that rising rates from the fed could lead to higher interest rates for borrowers. Ultimately, we don’t know exactly what will happen with refinance rates next year, but it is certainly possible that they could improve.
The good news for borrowers is that there is no cost to refinancing, and it can be done multiple times. By keeping an eye on student loan refinance rates, consumers can indirectly benefit from the corporate tax rate cut.
When the proposed tax law changes were first released we had major concerns for student loan borrowers. Fortunately, the final version improved upon the initial proposal.
Even though student loan borrowers are unlikely to get the same benefits of big businesses, if they get creative, they can improve their student loan situation.