By Joseph Reinke, CFA, Founder of FitBUX
With the passage of Trump’s tax bill and tax season on the horizon, many Members of FitBUXย have emailed me about the student loan interest deduction “controversy” and have asked for my opinion.ย
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.ย The total student loan interest deduction 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 Deduction?
- How Much Student Loan Interest Can I Deduct?
- My Thoughts on Student Loan Interest Deduction
What Is A Student Loan Interest Deduction?
Assume you borrowed $144,000 in student loans at a 6% interest rate. For the sake of simplicity, let’s also assumeย simple interest.ย This means you will pay $8,640 in interest for the year.
If you make $70,000 in income for the year, the student loan interest deduction would reduce your taxable income to $61,360 ($70,000 less the $8,640 you paid in interest).ย In short, if you are in the 20% tax bracket, deducting your student loan interest would put $1,728 in your pocket.
Currently, the student loan interest deduction is capped at $2,500 per year.ย As previously mentioned, this is reduced based on various circumstances, mainly your annual income.
One common question we get is: Can I deduct interest if I refinance my student loans? The answer is yes. If you want to learn more about student loan refinancing, check out our ultimate guide.
How Much Student Loan Interest Can I Deduct?
There are “phase outs” for how much interest you can write-off. The amount is based on modified adjusted gross income.
Below is a general threshold for your reference. I highly recommend using an accountant or accounting software to determine how much student loan interest you can deduct.
Taxes filed single or married and filed separately: Phase out begins at $65,000 MAGI and is completely phased out at $80,000.
Married and filing taxes jointly: Phase out begins at $135,000 and is completely phased out at $165,000.
My Personal Thoughts On Student Loan Interest Deduction
“Should you be able to write-off any interest or not?” This is the question that is often debated.ย That discussion is for another day because it involves a much deeper and longer conversation about the tax code as a whole.
However, I will discuss the student loan interest deduction 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.ย 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.ย 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 are owned by the Federal Government.ย Therefore, the interest you are paying is, in my opinion, already a tax.ย Not being able to deduct student loan interest 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….
Want to learn more about money? Be sure to check out FitBUX’s blog.
