Benefits Of Using Tax Refunds To Pay Student Loans

It is a good feeling to receive a tax refund. Can tax refunds be used to pay off your student loans? What are some benefits that come with paying your student loans with tax refunds? Learn more.

Updated by B Harshitha on 28th February 2020

Tax refunds can come in as bonuses. More often than not, tax refunds end up being bigger than what most people earn in a month. So, getting a tax refund is something that makes people happy. A major perk that comes with tax refunds is that the money that people receive will not be taxed. This makes tax refunds much more valuable than an actual bonus from work. 

While people would much rather use money from the tax refund to splurge on a holiday or a big purchase, it would be very judicious to devote this money towards student loans

This can be very beneficial for borrowers, as we will see how. We will learn about what a tax refund is and how using this to pay off student loans can be a very clever move.


What is a tax refund?

A tax refund is a return or reimbursement of the excess tax amount that a citizen pays to the federal or state government. Overpayment of taxes can be avoided by filling out form W-4 correctly and keeping it updated. Estimations will have to be done accurately for self-employed people to avoid this.

A tax refund can come in as a bonus that is not taxable. And you may be wondering if school loans accept tax refunds? The answer, in short, is yes.

Worried about student loans? Explore some of the best student loans.

Benefits of paying off student loan with tax refund

The following are some perks that come with devoting your tax refund money to paying off your student loans.

Enduring returns

Devoting your tax refunds to pay down your student loans can make your balance go down drastically. But that is just one obvious benefit.

As you pay down your student loan debt with your tax refunds, your balance continues to decrease. And as your balance decreases, the interest that your loan accrues will also continue to get smaller with passing time. 

The amount of money that you save on interest depends on the rate of interest that your loan has.

Pay off a loan entirely

If your tax refund seems to be sufficient enough to pay off a loan entirely, then that is something you must consider. If you eliminate a student loan now, your bill amounts in the future will be smaller. 

You can use this opportunity to eliminate all loans that you have with a specific lender, especially someone whose rates and terms you are not very pleased with.

Avoid poor purchases

By using your tax refund money to pay off your student loans, you will avoid making poor purchases. You can even avoid further debts that come with making hefty purchases. Since a student loan is a much more pressing affair than having a new luxury, devoting your tax refund to pay off your student loans is something you can not overlook.

Lender’s perspective

Lenders would much rather their borrowers make minimum payments over a longer period of time than pay it off in a shorter period of time. This is because the money that you pay as interest over a prolonged period of time will sum up to give them more income. They benefit in no way when borrowers make bigger payments and eliminate the loan in a shorter span of time.

You can minimize the amount of money you spend over time on interests by using your tax refund money to pay off your student loans.

Bottom line

If using all of your tax refund to pay back your student loans sounds boring or even irksome to you, then consider splitting your refund in two. Using one part to pay off your loans and the other to spend on anything else.

You are likely to look back and realize that the money that you spent on paying back your loans was very beneficial to you. You will end up saving a considerable amount of money that would otherwise have gone towards the interest.