Tax Refunds and your Student Loans

Michael Lux Blog, Student Loans 0 Comments

Most people dread tax season.  It is a yearly reminder that the only certainty in life is death and taxes.  Making matters worse is all of the paperwork.  Despite the headaches, for some people something magical happens… they get a big fat refund check.

Having hundreds or even thousands of dollars unexpectedly land on your lap is a great feeling, and the possibilities are limitless.  Today we will propose the most un-sexy option possible:  Use the money to pay down your student debt.  Even if it isn’t enough to entirely pay off a loan, use what you can to attack the debt.

Why this idea works

Instead of thinking about the cool stuff you can’t buy, look at it as the gift that keeps on giving.  Suppose you get a refund check of $1200.  Rather than purchasing a new tv, that money can put a nice big dent in your student loans.  If your interest rate was 10%, using that money will save you an extra $120 per year as long as you have that loan.  It is the gift that keeps on giving.

To recap, by paying the extra money, not only do you pay off your loan sooner, but you save a bundle in interest.

Finding the motivation

You don’t have to be an economist to know that using the money to pay down debt is a good idea.  The hard part is finding the motivation and self-control to actually do it.

There is one simple solution to this problem.  Spend some money frivolously.  Not all of it.  Not most of it.  But take a small portion of your refund and do something stupid with it.  Buy a meal you can’t afford at a fancy restaurant.  Do whatever it is that you do to treat yourself.

Just remember that there are strings attached.  As you enjoy that delicious steak, know that the rest of the check from the IRS will be used to pay down student loans.  For many, it means taking a check from one branch of the government, the IRS, and giving it to another, the Department of Education.  The transfer may seem ridiculous, but there is a finish line in sight… freedom from student loans.  Your sacrifice now will be your reward in the years to come.

A final trick…

Are you the type of person who waits until early April to file each year?  If you don’t even know whether or not you will be getting a refund check, it is much easier to spend it responsibly.

Before you do your taxes, tell yourself, tell your significant other, tell anyone who will listen that you know exactly where your tax refund will be going.  Tell them that check is for your student loans.  Once your possible refund becomes a real check, you will already have a plan in place and seeing all that money disappear will hurt a little less.

Bottom Line

It isn’t sexy, it isn’t fun, but it is the smart move.  Tax your tax refund and eliminate some student debt.