I am getting a check from my employer that I must apply towards my student loans. I am currently on income based repayment and PSLF.  The check is around 5% of the balance of my loans, but still a decent amount of money. I am wondering how to best apply the money and what would be most advantageous. 

I have all federal loans in about 12 disbursements. 11 of them have the same interest rate, and one of them has a slightly higher interest rate (a grad plus loan.) My plan was to pay off the principal on the disbursement that is the grad plus loan, because of the higher interest rate on that disbursement. The check I am getting is almost the same amount of that loan.

Alternatively, I am wondering if it would be better to apply the check from my employer entirely towards the interest on my loans instead, mainly because of the tax deduction for student loan interest. I am wondering if having a large amount applied towards the interest would essentially give me better incentives come tax time.

Thanks for any thoughts on the matter, or any other options I haven’t considered.

Just to be clear, do you mean you are getting a check from your employer that is solely intended by your employer to go towards your loans?

A grad plus loan does not qualify for PSLF. Only Direct loans do. If you plan to do PSLF, and your 11 other disbursements are Direct loans, by all means, I would apply all of it to the grad plus loan, because you are going to have to pay it off anyway (unless you consolidate it with another direct loan, but that would reset any qualifying payments you have made on that direct loan). Have you been sending in employment certification forms to make sure your payments are counting?

I know that you can only deduct $2,500 of interest paid towards your taxes per year.

Yes, I work for a federally funded non-profit, and we get sort of a yearly bonus with the condition that we have to apply it toward school loans. I didn’t know about the cap on interest or that the grad plus didn’t qualify, so that is very helpful. I will go ahead and pay off the grad plus, or perhaps apply just enough towards the interest to get to $2500 and then the rest to the grad plus.

I have been sending the employment certification forms, but I’m only about 18 months in at this point. Thank you for your insight!

Wow that sounds like a great incentive! With each employment certifications form, you should get a summary for each loan telling you how many qualifying payments you have made towards that loan. You will probably see nothing for the grad plus loan…but just check to make sure. I’ve got three loans that are direct loans and I get a summary sheet for each one. If you don’t have the paperwork, the myfedloans website has a tab for each loan where they display the number of qualifying payments. Best to find out now instead of 5-10 years down the road. Good luck!

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