What is a health savings account?
"A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit." (Wikipedia)
How do I manage my student loan debt with an HSA?
Essentially, the government allows individuals who are enrolled in a high deductible HSA eligible plan to deposit up to $3050 per year into their HSA, more if you are married or have a family. Their HSA can be set up through just about any bank for a minimal fee (PNC Bank charges $3.95 per month). The money that is entered into the HSA are not subject to federal income tax at the time of deposit, meaning you don't pay taxes on the amount you deposit. For example:
If I enter the full $3050 into my HSA and am in the 18% tax bracket, my annual tax savings would be $549 ($3050 * 0.18 = $549). Since we pay $3.95 each month, our total net savings is $501.60. I pay $1032 a month towards my student loans, so that is 48% of a student loan payment!!! OR that's 4% of my annual student loan payments that I don't have to worry about!!!
Before you open a HSA account, let me provide you with some extra information. When you deposit money into your account, you can not withdraw it. This is not like a normal savings account. However, you can use the cash to pay for medical expenses (paying your premium, co-payments, etc..) and are provided with a HSA Debit Card. You can even use the HSA Debit Card to pay for band-aids, cough syrup, thermometers, etc... as long as it is medical related. The money that is in the HSA earns interest, and when you reach a specified amount (usually $2000) you can enter the money into mutual funds or other forms of investment through the bank.
High Deductible Health Plans or HSA eligible plans typically have a lower monthly premium. For an individual like myself, who generally never visits the doctor and has health insurance for those "just in case" moments or annual check-ups, the high deductibles are fine. However, if you have significant medical problems, maybe an HSA is not right for you. Please check with a health insurances specialist to find the right health insurance plan that is right for you.
How I use my HSA:
My current monthly HSA Insurance plan premium is $113. I pay that amount from my PNC Bank account to make sure it is paid on time. I then add $117 (my premium plus the HSA monthly maintenance fee of $3.95) to my HSA account. When the money is added to the account, I make a health insurance claim of $113 through my HSA account letting them know that I used the money I deposited to pay for a medical expense. PNC Bank then send me a check or deposit the money directly into my personal bank account.
So why did I spend $3.95 to move $113 from one account to another, and back to another account? By moving the money to the HSA, the $113 is not subject to federal income tax when I deposit it. Essentially, every month I save myself $16.39 (113 X 0.18 - 3.95 = 16.39).
For more information, please visit the US Department of the Treasury.
Hope this makes sense. If you have any questions or comments, please feel free to write below.