Freezing student-loan payments saved just $2,000 per borrower, report finds

Average student loan balance
  • Student-loan payments are paused through September, with national savings of $82.7 billion on interest payments.
  • A report by Upgraded Points found this saved each borrower an average of $2,001 in interest.
  • California saved the most interest overall at over $8 billion – 10% of the national total.
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President Joe Biden extended the pause on student loan payments through September 30, and while the inclusion of the 0% interest rate on those payments provided financial relief, it didn’t add up to much for the average individual.

A report released on April 5 by Upgraded Points – a travel research group – found that since student-loan payments were originally paused under the CARES Act in March, the average interest saved per borrower was $2,001, and the national average for principal paused per borrower was $34,971. The state that saved the most interest overall was California at over $8 billion (10% of the national total), with New York slightly behind at $5.2 billion in interest saved.

The report noted that while national averages and total state savings were high, “on an individual borrower level, average borrowers only saved a couple thousand dollars in interest over the 12 months. While those couple thousand dollars could have been imperative in keeping borrowers in the black during pandemic-related hardships, these borrowers are still far from climbing out of the holes they dug in college. “

When the report analyzed the states that saved the most interest per 100,000 people, DC, Georgia, and Maryland were the top three locales, which results from a combination of small populations and high savings. On the other hand, the top three states with the lowest savings per 100,000 people were Wyoming, Utah, and Alaska because although those states have smaller populations, they also generally have lower principal debts and therefore fewer interest savings.

Here are the other main findings of the report:

  • The national total interest savings is about $82.7 billion;
  • Similar to most interest saved per 100,000 people, DC, Georgia, and Maryland saved the most interest per borrower, as well;
  • And North Dakota, Iowa, and Wyoming were the states that saved the least amount of interest per borrower.
UP: National impact of student loan freeze
Via Upgraded Points, the national impact of the student loan freeze.

While the payment pause and interest freeze have been instrumental in helping borrowers financially during the pandemic, the student debt crisis still looms far beyond the pandemic, with 45 million Americans holding $1.7 trillion in student debt.

Biden has already acted on the crisis by canceling debt for borrowers defrauded by for-profit schools and borrowers with disabilities, but lawmakers and advocacy organizations continue to call for the president to cancel $50,000 in student debt per borrower to lift the debt burden.

Sen. Elizabeth Warren of Massachusetts is one of the leading lawmakers calling for student debt cancelation, and she said on Twitter on April 17 that borrowers need relief now.

“The whole student loan debt system is broken, and it’s placing a massive burden on tens of millions of people,” Warren said. “They need immediate relief. And we need big, structural change to make higher education within reach for every family.”

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Interest income from your investments is taxable – here’s how to calculate what you owe and ways to lower it

interest income1
Most interest income earned by your savings and investments counts as taxable income. It’s taxed at the same rate as your regular income.

Paying income taxes is a fact of life. And when the IRS says income, it means all the money you make – both earned, from your work, and unearned, from your investments. That includes interest income – money generated by bank or brokerage accounts, and from certain assets, like bonds or mutual funds.

A few exceptions aside, most investment interest is taxable income. You’re required to report it on your return and give the government a cut of it.

 So it helps to know a little more about how interest income impacts your tax bill.

What is interest income?

Most types of interest income are subject to both federal and state taxes. This includes the interest you earn on or from:

Is any interest income tax-free?

Only one major type of asset generates non-taxable interest income: municipal bonds (“munis” for short) and private activity bonds. These are issued by states, counties, cities, and other government agencies to fund major capital projects, such as building public hospitals and schools, highways, power plants, and other civic buildings. 

All munis, along with municipal bond funds, are exempt from federal taxes. If the bond is issued by your home state, the interest income it provides is also free from state and local income taxes. 

Fast fact: Municipal bonds free of federal, state, and local taxes are dubbed “triple-tax-exempt” bonds. 

You also get a bit of a break on US Treasuries and savings bonds. You pay federal income tax on them, but they’re exempt from state and local income taxes. 

What’s the tax rate on interest income?

Interest income doesn’t have a special tax rate the way profits on your investments, aka long-term capital gains, do. You pay taxes on the interest as if it were ordinary income – that is, at the same rate as your other income, such as wages or self-employment earnings. 

So, if you’re in the 24% tax bracket, you’ll also pay a 24% rate on your interest income.

For the 2020 and 2021 tax years, there are seven tax brackets: 

2020 Tax Brackets (tax returns filed in 2021)

Tax Rate Single Head of Household Married Filing Jointly Married Filing Separately
10% Up to $9,875 Up to $14,100 Up to $19,750 Up to $9,875
12% $9,876 – $40,125 $14,101 – $53,700 $19,751 – $80,250 $9,876 – $40,125
22% $40,126 – $85,525 $53,701 – $85,500 $80,251 – $171,050 $40,126 – $85,525
24% $85,526 – $163,300 $85,501 – $163,300 $171,051 – $326,600 $85,526 – $163,300
32% $163,301 – $207,350 $163,301 – $207,350 $326,601 – $414,700 $163,301 – $207,350
35% $207,351 – $518,400 $207,351 – $518,400 $414,701 – $622,050 $207,351 – $311,025
37% $518,401 and up $518,401 and up $622,051 and up $311,026 and up

2021 Tax Brackets (tax returns filed in 2022)

Tax Rate Single Head of Household Married Filing Jointly Married Filing Separately
10% Up to $9,950 Up to $14,200 Up to $19,900 Up to $9,950
12% $9,951 – $40,525 $14,201 – $54,200 $19,901 – $81,050 $9,951 – $40,525
22% $40,526 – $86,375 $54,201 – $86,350 $81,051 – $172,750 $40,526 – $86,375
24% $86,376 – $164,925 $86,351 – $164,900 $172,751 – $329,850 $86,376 – $164,925
32% $164,926 – $209,425 $164,901 – $209,400 $329,851 – $418,850 $164,926 – $209,425
35% $209,426 – $523,600 $209,401 – $523,600 $418,851 – $628,300 $209,426 – $314,150
37% $523,601 and up $523,601 and up $628,301 and up $314,151 and up

Interest income can also be subject to another tax called the Net Investment Income Tax (NIIT). The NIIT is a 3.8% tax on the lesser of:

  • Your net investment income, which is generally all of your investment income (including interest, dividends, capital gains, distributions from annuities, income from passive activities, rents, and royalties) minus investment expenses, or
  • The amount of your modified adjusted gross income that exceeds $200,000 for singles/heads of household, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately.

How do I report interest income on my tax return?

Around January 31 of each year, you should receive Form 1099-INT from any bank, brokerage firm, or other sources of interest income showing the interest your investments earned in the prior year. 

In most cases, it’s easy to take the numbers from Form 1099-INT and transfer them to the appropriate place on your tax preparation software or tax return. The figures to focus on are in boxes 1, 3, and 8.

Boxes 1 and 3 of Form 1099-INT show regular taxable interest income and taxable interest from US Savings Bonds and Treasury Bonds. Box 8 shows tax-exempt interest. 

Where is taxable interest income reported on the tax return?

If you received more than $1,500 of taxable interest or dividends during the year, you report all of that interest and dividend income on Schedule B attached to your Form 1040. If your earnings didn’t reach that threshold, you don’t need to fill out Schedule B. Instead, you just report tax-exempt interest and taxable interest on lines 2a and 2b of your Form 1040.

Your 1099-INT forms should have all the info you need. They may not be complete, though. Banks and brokerage firms are only required to send you a form if they paid you more than $10 in interest during the year. So if you earned $5 in interest from a savings account, it’s still taxable – you just might not get a 1099-INT.

So, it’s a good idea to keep track of it yourself, too – because you’re required to report all interest income on your return, no matter how small. If you have lots of accounts in various places, it could add up.

Is there any way to avoid taxes on interest income?

It’s hard to avoid paying taxes on your interest income, but there are a few strategies to try, especially with assets that generate a lot of income. 

  • Keep assets in tax-exempt accounts, such as a Roth IRA or a Roth 401(k). No matter what the investment, you never owe taxes on anything earned in such accounts, as long as you obey the withdrawal rules. 
  • Keep assets in education-oriented accounts, like 529 plans and Coverdell education savings accounts. All earnings in these accounts are tax-free, as long as they’re used for academic expenses.
  • Invest assets in tax-deferred accounts, such as a traditional IRA or 401(k) to put off paying taxes until you withdraw the money in retirement, and you’re presumably in a lower tax bracket.
  • Invest in municipal bonds issued in your home state to qualify for the triple-tax-exempt treatment. 
  • Invest in US Treasuries to avoid state income taxes, especially useful if you live in a highly taxed locality. 

The financial takeaway

No matter the source, most interest earned by your savings and investments counts as taxable income. It’s taxed at the same rate as ordinary income – based on your regular tax bracket for the year. 

Avoiding interest income tax boils down to seeking out certain exempt assets – mainly municipal bonds and US Treasuries – and using tax-advantaged accounts, in which money earns tax-free or at least tax-deferred. 

The financial institutions holding your accounts send annual statements of your interest income called Form 1099. So keep track of these, and report all of your investment income. The IRS gets copies of all of your 1099s, so they’ll know quickly if you leave anything out. 

Related Coverage in Investing:

Where to invest when interest rates are low – 6 fixed-rate vehicles that offer the best returns

Investment income is money earned by your financial assets or accounts, and understanding how it works can help maximize your profits

How to take advantage of low interest rates – the best financial moves for investors and borrowers

Understanding the way compound interest works is key to building wealth or avoiding crushing debt. Here’s how to make it work for you

Fixed-income investing is a strategy that focuses on low-risk investments paying a reliable return

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