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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