Should you use your tax refund on your student loans?

Rejoice — it’s tax refund season! Time for your mind to wander as you contemplate the endless possibilities for your new chunk of change.

The average tax refund in 2019 was $2,860; that type of windfall can be used in a number of ways. But before you book a glamorous vacation, consider this: What if you used your tax refund to pay down your student loans? What kind of impact could that make?

The simple answer? A big impact!

How to get started

Tax refunds are an excellent opportunity to put a sizeable dent in your student debt. It will help you save money (in interest) over the life of the loan, and can help you pay off your loan faster.

Convinced? Great — let’s start by looking at all of your student loans. Do you have multiple loans or one consolidated loan? The answer will impact how you use your refund.

If you have one consolidated loan, your course of action is simple: Apply your tax refund as a one-time payment that’s applied directly to the principal, not as an advanced payment for the following month. Make sure to specify this with your lender.

The process gets slightly more complicated if you have more than one loan. Then you’ll have three options:

1. Apply the entire refund to your highest-interest loan so you can save the most money on interest.
2. Apply the entire refund to your loan with the lowest balance. That way, you’re closer to crossing one loan off your list entirely, providing a sense of accomplishment and narrowing your focus on your other loan(s).
3. Divide and conquer by spreading your refund across all of your loans.

How much money will you save?

That answer varies from case to case, but consider this example:

Melissa recently refinanced her $20,000 of student loan debt to a loan with a 3.0% interest rate. Her monthly payments of about $359 have her on pace to pay off the balance entirely in five years (60 months).

To speed up the repayment process, Melissa decides to put her $2,500 tax refund toward the principal of her student loans. Using a student loan calculator, she determines she'll save roughly $372 in interest over the life of her loan — and pay off the loan seven months ahead of schedule.

What a huge win for Melissa!

What to remember

Tax refunds are a considerable windfall for a lot of people, and deciding the best way to use those funds can be difficult and tempting. But dedicating your refund to paying down your student debt could save you some serious interest over the life of the loan(s), while also speeding up the clock on your repayment timetable. Just think: You’ll be that much closer to enjoying a student-loan-free lifestyle — and free to pursue other goals!

With interest rates so low, now’s a great time to refinance to lower your student loan payments, boost your cash flow, and save the money you need to reach your other financial goals.

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Citizens is here to help you navigate your student lending options for today and the future. Make sure to visit our Student Lending page — we’re on chat.