By Joseph Reinke, CFA
With the passage of the new tax bill, many Members of FitBUX have emailed me about the student loan tax deduction "controversy" and have asked for my opinion. For those of you that need a quick update, you can write-off a certain portion of the interest you pay on your student loans. The total amount is capped based on various factors. In addition, you lose the ability to write-off the interest once you hit a certain threshold in income.
What is a student loan interest tax deduction?
First off, what is a student loan interest tax deduction or writing off student loan interest? Let us assume that you borrowed $144,000 in student loans at a 6% interest rate. For the sake of simplicity, let's also assume simple interest. This means you will pay $8,640 in interest for the year.
If you make $70,000 in income for the year, a student loan interest tax deduction would reduce your taxable income to $61,360 ($70,000 less the $8,640 you paid in interest). In short, if you are in the 20% tax bracket, being able to write-off your interest would put $1,728 back in your pocket.
Currently, the max student loan interest tax deduction is $2,500 per year. As previously mentioned, this is reduced based on various circumstances, mainly how much money you make on an annual basis.
My personal thoughts on the student loan interest tax deduction
The high level argument is "Should you be able to write-off any interest or not?" That discussion is for another day because it involves a much deeper and longer conversation about the tax code as a whole.
Since Congress kept the student loan interest tax deduction, I will discuss it from the view point of "if we are going to have it, what should it be."
In my opinion, there is no reason to have a cap on how much student loan interest you can deduct from your taxes. You should be able to write it all off.
My reasoning is this... I believe anytime money leaves my pocket and goes to any government agency it is a tax. I don't care how you classify it, i.e. a tax, a fee, interest, whatever...if it goes to the government it is a form of tax.
93% of student loans in this country is owned by the Federal Government. Therefore, the interest you are paying is, in my opinion, already a tax. Not being able to deduct from your income is essentially being taxed twice.
Again, this is my humble opinion and only an opinion on if we are to keep any form of student loan interest tax deduction....