Increasing Your Pre-Tax Retirement Contributions May Lower Student Loan Payments
Whether you are a recent college graduate or a mid-career employee who returned to school, odds are that you have student loans to repay. Did you know that increasing your Hybrid Retirement Plan voluntary contributions or your contributions to the Commonwealth of Virginia 457 Deferred Compensation Plan or an employer-sponsored 403(b) plan can help lower your student loan payments?
Savings Lower AGI
When you make voluntary contributions (up to 4 percent) to your Hybrid Retirement Plan, money is deducted on a pre-tax basis. With pre-tax deductions, you lower your annual adjusted gross income (AGI). The same concept applies if you make contributions (other than Roth contributions) to the Commonwealth of Virginia 457 Deferred Compensation Plan or an employer-sponsored pre-tax retirement savings plan.
Any borrower with eligible federal student loans who participates in an income-driven repayment plan may benefit from increasing retirement savings. Most of these plans calculate your student loan payments based on your “discretionary income,” by measuring your AGI as a baseline. If you lower your AGI through increased pre-tax retirement savings, then you can generally lower your student loan payments when it’s time to annually verify your income with your student loan servicer. Types of income-driven repayment plans that measure your AGI include:
Explore Federal Programs
- Pay As You Earn Repayment Plan (PAYE Plan)
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
VRS members also may be eligible for the federal Public Service Loan Forgiveness (PSLF) program. With the PSLF program, an eligible borrower may have a remaining student loan balance forgiven after 10 years of public employment (e.g., VRS-covered employment). By participating in an income-driven repayment plan, contributing more toward your retirement, and thereby lowering your annual AGI, you likely can decrease the total amount that you repay on your student loans over the 10-year period.
Take Action on Savings
To increase your Hybrid Retirement Plan voluntary contributions or Commonwealth of Virginia 457 Deferred Compensation Plan contributions, log into your Account Access on your plan’s website, or call ICMA-RC Investor Services at 1-877-327-5261. If your employer offers a 403(b) plan, check with your human resource office. For more information on your federal student loans, repayment plans and the PSLF program, visit the Federal Student Aid website.