Can I Lower My Student Loan Payment by Contributing to My 401(k)?


Dear Steve,

I’m Paying a consolidated parent plus loan off. Also, I have a parent plus loan in deferment (daughter in school). The husband has a parent plus loan for another child and is going into repayment in a few months.

Also, I qualify for PSLF but those payments would be very high as is with my income so right now I’m paying standard for consolidated.

Should I get into ICR and try to lower my monthly payment by putting away as much money into 401k as I can. If it is put in 401k they cannot include in my AGI which means lower monthly payments?



Dear Sarah,

Let me focus on your 401(k) question.

I would strongly recommend that before you do anything that you use the official online calculator to determine what your actual consolidated ICR payment would be with an adjusted income.

However, since it seems everything in life has to be harder than necessary, you can’t just assume that 401(k) payments will lower your Adjusted Gross Income. Not all 401(k) payments will do that. For example, Roth IRA or 401(k) payments or anything contributed after-tax will not lower your AGI.

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The IRS defines Adjusted Gross Income by saying “Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account. Your AGI will never be more than your Gross Total Income on you return and in some cases may be lower. Refer to the 1040 instructions (Schedule 1) for more information.

If you are filing using the Married Filing Jointly filing status, the $69,000 AGI limitation applies to the AGI for both of you combined.” – Source

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You can consolidate things all of your Parent Plus loans into a new Direct Loan, repay the loan with an Income-Contingent Repayment (ICR) plan. ICR plans will inflate the total amount you owe, see this.

You can also try and shove the maximum amount into a 401(k) pre-tax to try and lower your income. The retirement savings now will grow and expand so you’ll have money ready when you do actually retire.

The other trap to watch for here is the AGI to lower loan payments may combine the income of you and your husband if you file jointly.

Damon Day - Pro Debt Coach

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