How to Pay Down Student Debt With Tax Refunds

Whether your tax refund is a few hundred dollars or a few thousand, it can make a large dent in your student loan debt, decreasing your monthly payments and the amount you pay in interest. For this reason, using your tax refund to pay down your student loan debt can be a smart financial decision. However, the U.S. Department of Education can also seize your entire refund if you are behind on any federal student loan payments.

Instructions

Paying off Loans Not in Default

1

Deduct the maximum amount for your student loan interest. The IRS allows most borrowers to deduct $2,500 or the total amount you paid in student loan interest, whichever is less. Deductions allow you to decrease your tax liability, which means a bigger refund to use for repaying your student loans.

2

Maximize your refund. Start preparing your taxes early so you have time to locate bills and paperwork and review your taxes. Consult with a professional tax preparer to ensure you are not missing any credits or deductions. Ask the preparer about new state programs and lifestyle changes, such as having a new baby or getting married, that could affect your taxes.

3

Examine each of your student loans to find which has the highest interest rate, and decide to apply your refund to this loan. This will save you money in the long run, as you will pay less money in interest.

4

Call the loan company to confirm the amount owed. Ask the company to provide you with a "payoff amount" if you think you will be able to pay off your loan in its entirety. The entire amount you actually owe on a student loan debt is slightly more than what is on the statement, as more interest accrues each day. By getting a payoff amount, you'll know exactly how much you need to pay. Otherwise, you could have a few cents or dollars still accruing interest and late payment fees adding up while you think the debt is gone. When you get your refund, pay off the loan, or pay as much as you can on this loan.

Paying Off Loans in Default

5

Call the loan or collection company and attempt to work out a settlement. According to Fastweb.com and FinAid.com publisher Mark Kantrowitz, you can ask the company to reduce the either the entire amount or the unpaid interest. Know what your tax refund will be, and try to get a settlement amount close to your refund. Ask the company to send you a written notice of the settlement agreement, and review it with a lawyer before you pay.

6

Ask the company to waive the collection charges. If the loan has gone into default but you have settled for an amount that will be paid in one large sum when you get your tax refund, the collection company may waive the collection charges, Kantrowitz told the "New York Times." This means you will get to save more of your refund, or have less to pay above and beyond the refund. Once you have reached a settlement or a waiver of collection fees that both you and your lawyer think seems fair, pay the loan using your tax refund.

7

Allow the Department of Education to seize your tax refund if a settlement cannot be reached on you federal loans. If you are unable to work out a settlement following the process in Step One, you may have no choice other than to allow the Department of Education to take your tax refund. However, the government must notify you and give you a chance to make a payment arrangement before they take your tax refund. If you have a private student loan in default, the government cannot seize your tax refund, but you will likely suffer a large reduction in your credit score, and you may be sued.