March 2008

With taxes due in a couple of weeks, I’m a little late in covering this topic, but it should still come in useful for people, like me, that tend to put some things off until the last minute. Regardless of when you file your taxes, I think everyone can agree that we’re all interested in one thing — saving money on taxes.

Fortunately, there are a few tax breaks specifically for college students and recent grads, which could save you thousands of dollars over the years. Here’s a brief overview of the tax breaks available for college students and recent grads:

Lifetime Learning Tax Credit

This tax credit is available to students who take at least one class from an accredited school. This includes both undergraduate and graduate institutions. Students who qualify can get credit for 20% of the first $10,000 they spend on educational expenses, resulting in a maximum credit of $2,000. To qualify for this tax credit, single filers must have an adjusted gross income of less than $57,000, and joint filers must make less than $114,000.

Hope Scholarship Tax Credit

This tax credit is available to students who are enrolled in college at least half-time and are in their first two years of undergraduate study (freshmen and sophomores). The income cap requirements are the same as the Lifetime Learning Tax Credit. Students who qualify are eligible to receive 100% of their first $1,000 and 50% of their next $1,100, resulting in a maximum credit of $1,650. To be eligible for this credit, the student must be free of any felony convictions involving the possession or distribution of controlled substances before the end of 2007.

Tuition and Fees Deduction

Single filers with adjusted gross incomes between $65,000 and $80,000 or families who make between $130,000 and $160,000 may be eligible for as much as a $4,000 deduction. This deduction can benefit taxpayers who do not qualify for either the Hope Scholarship or Lifetime Learning Education Tax Credits. Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible postsecondary institution. Since the Tuition and Fees Deduction is taken as an adjustment to income, you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). However, the deduction only includes the cost of tuition and fees. Personal living expenses such as room and board, insurance, medical fees, and transportation are not deductible.

Student Loan Interest Deduction

If your adjusted gross income is less than $70,000 (or $140,000 for a joint return) and you’re paying back student loans, then you qualify for the Student Loan Interest Deduction. You can reduce the amount of your income subject to tax by up to $2,500. Similar to the Tuition and Fees Deduction, you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). For more details of what qualifies as student loan interest, read more about the Student Loan Interest Deduction at the IRS site.

That does it for my roundup of tax benefits available for college students and recent grads. Please note that I am by no means a tax expert, so feel free to correct or clarify any information that may not be completely accurate. Also, check out the following resources for more detailed information about the tax breaks I mentioned above:

• Tax Benefits for Education
• Federal Tax Benefits for Tuition and Fees

It’s no secret that my financial goal for this year is to pay off $10,000 of my student loans. To achieve this goal, I have to put $834 each month into paying off my student debt. I’m happy to report that I’m still on track after the first three months of 2008.

This means that in this year alone, I’ve already saved up $2502 to put toward my student loans!

After learning a lesson or two from Squawkfox about how to quickly pay off student loans, the tax refund I’m expecting to get this year will go straight into knocking out some more of my student debt too. Who knows? I might even be able to pay off more than $10,000 of my debt by the end of this year.

Sometimes the best way to accomplish something is to follow in the footsteps of someone who has done it already. When it comes to paying off student debt, Squawkfox is definitely a great role model. After reading about how she paid off all of her student debt in six months, I was a bit envious. It’s an awesome accomplishment, and she shares some wonderful tips on how she did it. I’m almost 100% sure I won’t be able to pay off all of my loans in six months (unless I win the lottery, which I don’t play), but I’d still like to pay off my student loans as quickly as possible. Therefore, I’m going to take Squawkfox’s advice and evaluate how closely I’m following in her footsteps to a student loan free life.

1. Negotiate your first job offer

If I could turn back time a few months, I would follow this advice. Although I’m not sure if it would have worked for my job, it would have been good experience regardless of the outcome. I am definitely going to follow this advice on my next “first job offer”.

2. Keep living like a student

Sometimes I wonder if I’m ever going to grow out of living like a student. I’m currently renting a room in a house to save on rent. Occasionally, I stay late at work to take advantage of free leftovers for dinner. I also carpool with a friend when our schedules work out. My spending habits haven’t changed since I started my job. However, I now live in a city with an extremely higher cost of living than the college town I lived in before, which eats into how much I save by continuing to live like a college student.

3. Use all available tax credits

In the U.S., there are a few tax breaks available for college students. While it would take an entire post to go through the details of each one, here’s a list of the available tax breaks: Tuition and Fees Deduction, Student Loan Interest Deduction, Hope Scholarship and Lifetime Learning Tax Credits. If you’re a grad student, be sure to look into these tax breaks, because they can save you thousands of dollars if you qualify for them. I’m looking forward to getting a tax refund thanks to the Tuition and Fees and Student Loan Interest deductions, and guess where it’s going? Straight into paying off my student loans.

4. Save for retirement

You’re probably wondering how saving for retirement helps you pay off student loans. Well, in Squawkfox’s words, “You contribute to retirement, you get tax breaks, you get tax refunds, you then feed the refund to your debt. You win the ‘get outta student debt game!’” This is brilliant. The more you pay yourself first, the faster you’ll get out of debt. With that being said, I’m currently saving for retirement in a Roth IRA and Roth 401(k), which means I’m not getting any immediate tax breaks. However, I do enjoy the satisfaction of growing a nest egg.

5. Delay buying stuff

This one is probably what most recent graduates struggle to do. After getting their first “real” job, a lot of people want to live in the nicest place they can find and start buying new stuff — car, furniture, electronics, etc. I’ve been tempted to buy new toys that I don’t really need. Sure, a flat panel HDTV would look pretty sweet in my room, but after asking myself if I really need it right now, I’ve been able to resist the temptation. The same magic of compounding interest that works for you when it comes to saving money works against you when it comes to debt. By buying things you don’t need before paying off your debt, you could end up exponentially increasing the amount of time and money it takes to pay off your debt. The question I asked myself is, “In two years, would I rather have an outdated HDTV or be completely free of my student loans?” I think you know the answer to that one.

Here’s a quick summary of the carnivals I participated in last week.

Carnival of Personal Finance

Last week Lynnae from Being Frugal hosted the St. Patrick’s Day Edition of the Carnival of Personal Finance. My article about whether or not I could have avoided student debt was included. Be sure to check out the rest of the carnival for some great reads.

Festival of Frugality

I’ve Paid For This Twice Already… hosted the Festival of Frugality. Drop by and you’ll find my post on why you should never pay for something you can get for free as well as a bunch of other great tips on how to live frugally.

In elementary school, we are taught the difference between the denotation and connotation of a word. For those of you who may have missed that day, the denotation is the literal meaning of a word, and the connotation is the emotional association attached to word in addition to the literal meaning. The connotation of a word is subjective and varies based on cultural differences.

Because of connotation, you can use two words that mean the exact same thing, but get a totally different reaction based on which word you choose. Take two words you constantly hear when people talk about money — broke and poor. According to the dictionary and thesaurus, broke and poor mean the exact same thing, but if you ask someone whether they would rather be broke or poor, I think most people would be able to give you an answer.

Broke and poor may be interchangeable, but the feeling the words convey are completely different. Imagine if I had called myself Poor Grad Student, instead of Broke Grad Student. Would you think differently of me?

I feel that broke describes a temporary state of affairs. I may be broke now, but I will not always be broke in the future. On the other hand, poor seems to describe a more permanent condition. Someone who is poor is likely to stay poor in the future. The word poor evokes a sense of hopelessness, while the word broke still elicits a sense of hope.

Not surprisingly, I’d prefer being broke over being poor any day of the week. I’ve felt broke many times throughout college, but I’ve never felt poor. I chose the name Broke Grad Student, because I am hopeful that I’ll get out of my student debt in a reasonable amount of time.

What do the words broke and poor mean to you?

After reading a profile on personal finance blogger, Ramit Sethi, from I Will Teach You To Be Rich, I discovered a great list of tips he recommends for young adults to get started managing their money. For some people, this advice will be a complete makeover of how they have handled their finances in the past. For others, it will be a list of things that they’ve already been doing. I’ve decided to evaluate how I’ve been doing to see if I’m in need of a financial makeover or if my financial makeup is just fine.

Figure out how much you’re spending per week and set up a budget.

This is one of the first things I did after working at my new job for about a month, except I calculated an estimate of how much I was spending per month. Using this estimate I was able to estimate how much I expect to spend in a year on the bare necessities — rent, food, gas, etc. I always round up when estimating my expenses. This leaves some room for error and provides a buffer for unexpected expenses that might come up and potentially bust your budget. After crunching the numbers, I determined that paying back $10,000 of my student loans by the end of the year is completely feasible as long as I keep on track.

Make sure you’re not paying fees on your bank accounts or credit cards.

This one seems like a no-brainer, but there must be people out there who are paying fees. Otherwise, banks and credit cards wouldn’t keep these fees around. My advice is simple — switch to a bank or credit card without fees if you’re currently paying fees.

Get your credit report.

I’ve done this for the past few years, and it’s a great way to inspect your personal financial record. Once every 12 months, you can get a free credit report from each of the nationwide consumer credit reporting companies at AnnualCreditReport. Checking your credit report will allow you to see if there is anything suspicious going on with your accounts and hopefully fix these issues before they get out of hand. Getting my credit report helped me discover a credit card that I don’t remember receiving or activating. Even if you don’t activate a credit card, it still appears on your credit report. Fortunately, that line of credit had not been used, and I promptly closed it.

Open a high-interest bank account.

Having previously written about why every student should have a high-interest bank account, it should come as no surprise that I opened one of these a few years ago. While the interest rates are pretty low at the moment, it’s still something every college student should have in my opinion. Whether it’s extra loan money, earned money, or money from your parents, keep your extra funds in a high-interest bank account and earn some extra cash instead of letting it sit in a regular bank account.

Establish a savings goal of 20 to 30 percent of your income, if possible.

With the amount of student loans I have to pay back, saving 20-30% of my income isn’t feasible at the moment, unless I pay back my student loans more slowly. This brings up the issue of whether I should pay off more debt now or invest more now. From the research I’ve done so far, the best option seems to depend on each individual situation. I have some more numbers I need to crunch before I make my final decision, but at the moment, it seems like getting my student loans paid off is the better option for me.

Open an investment account at a discount brokerage.

I actually did this when I was still working on my undergraduate degree. The sooner you start investing, the better. Here’s my first investing story.

Fully fund 401(k)s and Roth IRAs.

Similar to the 20-30% savings tip, fully funding my 401(k) and Roth IRA isn’t feasible right now. While I can’t afford to max out my contributions this year, I’m certainly not going to pass up some free money. I’m doing this by contributing at least enough into my 401(k) to get the maximum company match.

Well, I feel like my financial makeup is in pretty good shape, although I could use a touch up here and there. I’m currently not able to save and invest as much as I’d like, because I have student debt to pay off. However, I’m excited, because I’m on track to knock out half of my student loan debt by the end of the year. Now that I’m done putting myself on the hot seat, it’s time to turn the tables.

Do you need a financial makeover?

One day a professor was giving a big test to his students. He handed out all of the tests and went back to his desk to wait. Once the test was over, the students all handed the tests back in.

The professor noticed that one of the students had attached a $100 bill to his test with a note saying “A dollar per point.” The next class the professor handed the tests back out.

This student got back his test and $64 change.

Green Panda Treehouse hosted last week’s Festival of Frugality with an architectural design theme. Now that I’m done hosting the carnivals/festivals, I’m starting to participate in them again, and it’s been a lot of fun. My article about why you should never buy a new textbook was featured as an Editor’s Pick!

Even though I managed to rack up $20,000 in student loans during grad school, it certainly could have been worse. Some college students graduate with credit card debt in addition to their student loans. I was fortunate enough to avoid this by living frugally.

Sure, it was tempting to spend the extra loan money on a nicer apartment or nicer stuff. I could have thrown a few parties or spent a little extra when I was out with my friends. However, I decided to follow one of the golden rules of frugality instead — never pay for something you can get for free. Throughout college, I’ve managed to save thousands of dollars by following this simple rule. Here are a few examples:

Couches
I never paid for a couch while I was in college. College towns are full of free couches. If you can’t find one there, then ask your friends and family. You’re almost guaranteed to find a friend or relative who has an extra couch they’re no longer using. I got my last free couch from an old high school friend who was graduating when I was starting grad school. I used it for three years and then passed it on to another friend for free of course.

Beds
Another piece of furniture I never paid for in college was a bed. My roommate’s parents had an extra bed that they let me borrow during my undergrad years. In grad school, I borrowed my sister’s old bed from my parents’ house. Be sure to keep in touch with your friends and classmates as the end of the semester approaches, because that’s when people usually move. This is the best time to find free stuff, because everyone is trying to get rid of the things they no longer need.

Dishes and Silverware
I’m not going to lie. It helps to be a younger sibling, because you get the benefit of hand-me-downs. I used my older sister’s dishes and silverware throughout grad school. If you don’t have older siblings, then check with your friends. In addition to my sister’s stash, I also got an extra set of dishes and silverware from a friend. So the dishes didn’t exactly match with each other, but who cares? They were completely free.

Electronics
Once again, friends and family are your best best for finding free electronics. Your dad will be happy to give you the old TV from home to make room for that new flat-panel HDTV. In the past few years, I’ve used an old TV from my parents and shared a new TV with a roommate (his TV). I recently acquired a 4-year-old TV absolutely free from one of my friends after he got a flat-panel HDTV.

Drinks
This one is plain and simple. Either be an attractive female or know the owner of the bar.

When I was growing up, my dad used to coach my Little League baseball team. I enjoyed having my dad as a coach instead of a complete stranger, but it also meant that the coaching didn’t stop when we got home. While it might have been a little annoying at the time, I guess it worked because I still remember one of his lessons to this day. His favorite lesson was that baseball is 90% mental and 10% physical.

While I probably didn’t fully understand what that meant as a 9-year old, it stuck with me, and over the years, it has started making more and more sense. I’ve come to realize that this lesson can be applied to many areas of life. In fact, if you’ve played any competitive sport, you’ve probably heard the saying, “Winning is 90% mental and 10% physical.” There’s even a famous book called The Inner Game of Tennis that focuses entirely on the mental aspect of achieving your peak performance.

What does any of this have to do with debt?

Fundamentals are the most important part of the physical aspect of any sport. You’ll never be good at baseball if you don’t know how to throw one. Improving your fundamentals takes a lot of hard work. This is where you put in the blood, sweat, and tears. It requires countless hours of drills and training to refine and develop your physical skills.

Similarly, it requires innumerable amounts of training and work to generate a source of income in the money game. Whether it’s working a job or running a business, you have to put in a lot of effort to develop the skills just to be able to play the game. But this is only a small part of the game, and almost everyone can master the physical aspect of the game.

If anyone can master the physical part of the game, then what separates average players from elite players? Knowing how to throw a baseball does no good in an actual game unless you know when and where to throw it. This is where the mental side of the game comes in. A lot of people may know how to throw a baseball, but not everybody knows when and where they should throw it in a particular situation.

The same concept can be applied to the money game. A lot of people know how to earn money, but not everybody knows when and where to use the money. People have the physical skills to play the game, but they haven’t developed the mental smarts to utilize their skills effectively. This is what makes the money game so challenging.

I think a lot of people make enough money to get out of debt, but that’s only 10% of the game. It’s the other 90% that most people struggle to overcome — the mental side of the game. I know a lot of people who know what they need to do, but they have trouble convincing themselves to actually do it. There’s a huge difference between thinking about an action and actually doing it. It’s what separates the thinkers from the doers.

In the game of money, are you a thinker or a doer?