While repaying $107,000 in student loans, Student Loan Hero CEO Andrew Josuweit employed a unique debt payoff strategy: moving to a state with no income tax.
Josuweit was living in New York City – and paying some of the highest state income tax rates in the nation – when he decided to move to Austin, Texas. With no state or municipal income taxes in his new city, relocating freed up around $15,640 of Josuweit’s income.
Taking advantage of these tax savings and a 20 percent drop in living expenses, Josuweit used his newly freed-up money to make extra payments and knock out his remaining student loan balance. He sent his final payment in September 2016.
While Josuweit’s results might not be typical, the savings can be real for any resident of a state that levies a local income tax. That’s why Student Loan Hero conducted a study to see how much an average worker could potentially save if they live or work in a location with no state income tax.
Here’s how much you could potentially save – or put toward your student loans – without paying state income tax.
No state income tax could save an average of $1,977
Looking at how much a typical wage-earner makes in each state, we calculated the state income tax a single filer with no dependents could expect to pay.
Overall, the average state income tax – among states that levy an income tax – was $1,977 with an average effective tax rate of 4.05% compared to the national average salary.
That’s a significant cost, one that taxpayers can avoid altogether by living or working in one of the following nine states with no income tax:
- New Hampshire
- South Dakota
These savings are especially advantageous when combined with high incomes. For instance, average workers in Alaska, Washington, and New Hampshire all earn more than $50,000 a year.
Effective state income tax rates are as high as 7.75%
But the differences in state income tax burdens varies widely. The five states with the highest effective income tax rates include:
- Oregon: 7.75%
- Washington, D.C.: 5.86%
- Iowa: 5.03%
- New York: 5.01%
- Idaho: 4.98%
Workers in Oregon face the highest income taxes of all, with an effective tax rate of 7.75% on a median salary of $49,710. That comes out to an average state income tax payment of $3,851 a year.
While New Hampshire residents earn similar wages, an average of $50,180 a year, they face no state income taxes. That means, compared to Oregon residents, they save $3,851 a year working in a state that doesn’t tax income.
Right behind Oregon is the District of Columbia, with an effective tax rate of 5.86%. But D.C. residents also have much higher incomes on average, at $82,950. High state income tax rates, combined with high incomes, gives D.C. residents the highest state income tax bill at $4,858.
Some states have tax codes that keep the burden on residents low. The five states with the lowest effective income tax rates are:
- North Dakota: 0.86%
- Ohio: 2.18%
- Arizona: 2.52%
- New Jersey: 2.76%
- Vermont: 2.78%
A third of student loan borrowers would move
But would people be willing to move states to save on taxes? A recent Student Loan Hero survey of student loan borrowers found that some would. Here’s a quick breakdown.
- 18 percent would move to a state with no income tax save money.
- 12 percent say they would move if it could save them $3,000 or more in state income tax.
- 70 percent say they would not be willing to move for income tax savings.
Overall, 30 percent of respondents who work in a state that levies an income tax say that they would be willing to move to a different state with no income tax to save money.
Additionally, 38 percent of these taxpayers say they’d use state income tax saving savings toward their student loans.
- 12 percent would put all of their state income tax savings toward student loans.
- 26 percent would put a portion of the money saved from less state income tax toward their student loans.
How does not paying a state income tax affect student debt repayment?
The money you could save not paying state income taxes can go directly towards your student loan balance, placing you that much closer to your final payoff date.
Putting down more money toward your student loans also lowers the principal balance you’re paying interest on. That can help you save big over time.
Average savings for undergraduate debt: $872
Take the average American who pays $1,977 in state income tax. If she avoided this cost when filing taxes, she could instead put those funds toward student loans.
For a new graduate with $35,000 in Direct student loans at an interest rate of 3.76%, an extra one-time payment of $1,977 would let her save $872 in interest over 10 years, according to our Lump Sum Extra Payment Calculator. Plus, it would take off eight months of her repayment period. This assumes the borrower is currently making student loan payments of $350 a month.
But the savings are even greater if the student loan borrower rolls over these tax savings into extra student loan payments each month.
For instance, let’s say you broke up that $1,977 into 12 lump sum payments of $165 and applied them as an extra monthly payment on student debts. According to our Student Loan Prepayment Calculator, the same borrower listed above would save $4,154 in interest and get out of student debt in 6.4 years, rather than 10.
Average savings for graduate debt: $1,684
Let’s take a graduate who earned a master’s degree and has a median debt of $57,600, as reported by the New American Education Policy Program.
Due to a higher interest rate of 6.31% attached to Graduate PLUS loans, putting a lump sum of $1,977 in income tax savings toward a student debt would net even bigger savings: $1,684. This assumes the borrower is currently making student loan payments of $648 a month.
When you apply an extra monthly payment of $165 toward your PLUS student loans rather than a lump sum, these state income tax savings add up. A borrower would avoid $5,508 in student loan interest and finish repaying student loans in just 7.4 years.
Calculate your potential income tax savings
Of course, everyone’s student debt and tax situation are different. There’s no guarantee that moving to a tax-free state would net you these kinds of savings.
The calculator below can help you estimate how much an out-of-state move would affect your tax liability. And it can show how much you’d save if you applied any extra savings to your student debt, including both federal and private student loans.
State Tax Savings Calculator
Effective tax rate
Net taxable income
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Total loans paid
Total interest paid
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While there are many factors that go into a major life choice like choosing where you live, this study reveals that state income taxes should be a key financial consideration during your decision-making process.
What’s more, your state’s income tax laws can either help you get ahead financially or set you back if your state’s effective tax rate is higher than most.
This survey calculated the typical state income tax burden in each state using May 2016 Bureau of Labor Statistics wage data from the U.S. Department of Labor, as well as state tax data from the Federation of Tax Administrators and Tax-Brackets.org. Tax calculations assumed a single filer was claiming one exemption and a standard deduction, according to the state’s tax laws.
Projected student loan savings assumed a borrower was just entering repayment on a 10-year standard repayment schedule. Calculations for undergraduate debts assumed a balance of $35,000 at the current Direct federal loan rate of 3.76%. For graduate debts, this study assumed a balance of $57,600 at current Grad PLUS loan rates of 6.31%.
The survey was conducted as a Google Consumer Survey, run from March 11-14, 2017. It collected answers from 1,018 respondents who have student loans. The largest margin of error present in any survey response was 3.1 percent.
The table below displays the projected income tax of a single person earning an average wage in each state. It also shows the potential savings one could net if they had no state income tax and applied savings to student loan repayment, per the assumptions above.
|District of Columbia||$82,950||$4,858||5.86%||$2,012|
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.54% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of March 18, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 0318/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.5% effective February 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.54% – 7.12%3||Undergrad & Graduate|
|2.54% – 7.27%1||Undergrad & Graduate|
|2.67% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.69% – 7.43%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|