The Ins and Outs of Student Loans

As the price of a college education continues to rise, so does the financial burden placed upon students and parents. In 2017, the average cost of a college degree is $28,000 a year for public schools and $59,000 for private—a hefty sum few families can pay out of pocket with ease. As such, it is no wonder that outstanding student debt in America hovers around $1.3 trillion, as the average cost for the class of 2016 is $37,172 per person and is growing at a rate of approximately $2,726 every second.

For first-time students and their families, the wide world of student debt is fairly overwhelming. The details of how much to borrow, where to borrow, and how to plan appropriately for the future can prove to be a lot more challenging that it initially appears.

Charting the Map of FAFSA

Student LoansIn the United States, government Direct Loans are the most common form of aid. With interest rates lower than private lenders like Fannie Mae or Freddie Mac–and available in both subsidized and unsubsidized forms–government lending provides an easier alternative for families in need.

To qualify for federal student loans, students and their families must submit the FAFSA, or Free Application for Federal Student Aid, by the June 30th deadline each year. This form, detailing income, savings, and more, helps to determine everything from need-based aid to student loan eligibility.

Despite the growing cost of a degree, Direct Loans are limited based on academic year. For first-year dependent students, total borrowing is capped at $5,500 with no more than $3,500 in subsidized loans. This amount rises slightly – up to $7,500 total with no more than $3,500 in subsidized loans – for third year students and up. For families unable to pay the difference, Direct PLUS loans for parent borrowers can help bridge the gap.

Changes to FAFSA Beginning in 2017

  • Submit a FAFSA Earlier: Students are now able to submit a FAFSA as early as October 1.
  • Use Earlier Income and Tax Information: Beginning with the 2017-18 FAFSA, students will be required to report income and tax from an earlier tax year. For example, on the 2017-1 FAFSA, students will report their 2015 income and tax information rather than their 2016 information.


Taxes and Student Debt

The weight of student loan debt can seem crushing, however there are some reprieves once the repayment period begins. The interest paid on student loans is deductible for tax purposes, up to $2,500 per year. For parents helping to repay student loans, this may not be such a benefit – only the student who serves as the primary borrower is permitted to take the deduction, and only if they are able to file as independent. For students, however, any ability to save throughout repayment is a much-needed advantage.

Student loan interest serves as an above-the-line deduction, meaning that it is applied as a part of the calculation to determine adjusted gross income. This means that no Schedule A itemization is required – a perk for young adults taking a standard deduction. These benefits don’t last forever, however; the eligibility of student loan interest deductions begin to phase out as AGI exceeds $65,000 for single filers and $130,000 for couples.

Financial Planning for the Future

If you’re unsure how to proceed with college financing, that’s okay. Finding the best option is not always easy, and proceeding with confidence can take a little professional intervention. Klein Hall CPAs can provide assistance throughout the process, offering FAFSA and college planning strategies to help you and your child make the most out of the exciting period of undergraduate education.

Looking for more information? Contact Klein Hall CPAs today for a custom approach to planning for the future.