What's the Scoop on Writing Off Student Loan Interest?

Written by James Hirby | Fact checked by The Law Dictionary staff |  

If you haven't bothered to calculate the dollar value of the interest that you pay on your student loans each year, you should do so sooner rather than later. Chances are good that your outstanding student loans are costing you several hundred dollars per year in interest charges alone. When you factor in your principal repayments, it's likely that you're shelling out many thousands of dollars to pay for the education that you received years ago.

Fortunately, the federal government offers some relief for folks who struggle with crushing student debt obligations. As long as you've graduated from college or graduate school and continue to make timely payments on your loans, you're eligible to deduct the interest that you pay on your student loans from your total taxable income. This deduction is worth up to $2,400.

Since the prevailing interest rate on federally-backed student loans hovers between 5 and 9 percent, it's likely that you'll be able to deduct the interest payments on loans with a combined value of up to $40,000. Since the average college student graduates with about $20,000 in outstanding loans, this should provide a significant boost to your bottom line and may cover the entirety of your interest-bearing obligations.

You can't write off interest on student loans above this $2,400 threshold. More importantly, you can't write off the principal payments that you make on your student loans. If your total monthly student loan payments total $1,000 and carry an average interest rate of 6 percent, you can only write off $60 of your monthly payment each month. Over the course of the entire tax year, this write-off would add up to $720 on a total payment of $12,000.

If your total gross income for the year was $50,000 before the write-off, you would need to report just $49,280 to the IRS after taking your deduction. Assuming that your effective tax rate is 25 percent, this would save you $180 for the year. While that seems like a far cry from the $12,000 in total student loan repayments that you made over the course of the year, $180 is a significant amount of money. If you're in the "25 percent" tax bracket, you stand to save a maximum of $600 using the student loan interest deduction. If you're in the "39.6 percent" tax bracket, you'll save up to $950.40.

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