Thank you to a new BP reader, Jeff for suggesting the idea for this blog post on the student loan interest deduction tax law. We are always excited to hear and interact with readers, just shoot us an email at email@example.com or use the contact us form if you have any ideas, suggestions, etc. Our site is growing (more than 5,000 visits per month now) but still small enough that we can respond to almost every email we receive (so long as it isn’t spam). If you haven’t already, please subscribe to our site! (It don’t cost nothing).
College Student Loan Interest Deduction
People with a large amount of debt such as my wife and I are often asked what type of debt we have. “Student Loan Debt, and that’s it” we always reply (although this will change soon now that we are in the middle of purchasing our first house).
“That’s good debt.” We always here back.
One of the main reasons people cite as to why it is good debt is the alleged big tax benefits. Now I am not a tax expert, in fact tax law was probably my least favorite class in law school. That said, my understanding of the current law is, not as an attorney but just some blogger doing a little internet research, as follows:
- The current student loan interest deduction is relatively new. It was set to expire this year but was extended
- It allows $2,500 to be deducted (or the amount of interest paid, whichever sum is smaller) (even when using a standard form). Only the person responsible for repayment of the loan can deduct it and married parties filing separately cannot each take this deduction. It appears that married couples can, like their single counterparts only deduct $2,500 total, even if they are in a situation like my wife and I, who are both repaying our own separate student loan debt that we accrued in large part or entirely prior to our marriage.
- Now this is where it gets important for my rant (see below): there is a phase-out of the amount you may deduct once your salary reaches $60,000 if you are single, and $120,000 if filing joint. You may not claim this interest at all if you earn more than $75,000 single or $150,000 joint.
(Note: If you want the full deal straight from the horses mouth, click on this link to see more details from the IRS website regarding the student loan interest deduction.)
Student Loan Interest Deduction: Rant (Opinion)
Now like most blogs a lot of what I write on the site can be classified as my opinion. However, I usually try not to be opinionated.
I am making an exception here because I do not believe there should be an income cap on this $2,500 maximum deduction.
Now I know some of you may be thinking, why should those “rich” people that earn more than $75,000 single or $150,000 joint get any such benefit. I probably use to think like that myself, but the fact of the matter is, if you are earning that much money then you likely had to take out a lot of student loans. (Also, today $150,000 for a family does not make you rich if you have a high debt load, etc).
Although most interest cannot be written off and the student loan interest deduction is a special exception, this neglects the correlation between a higher salary and the amount of student loans needed in many cases to achieve that salary level.
In other words, people who will receive this deduction may have correspondingly smaller student loan balances, whereas a person earning what may appear to be a large sum of money like $75,000 may be paying $10,000+ per year in interest, thus leveling the playing field.
That same student loan interest cannot be discharged in bankruptcy (except in the most extreme of examples). Moreover, like almost all debt, if your student loan debt was somehow forgiven, it would be considered taxable income.
A final point is this: aren’t people in the higher bracket already penalized enough by paying higher taxes anyway? Shouldn’t we be inspiring people to earn more, particularly if they have a lot of student loan debt owed to the government?
Student Loan Interest Deduction: Conclusion
Thanks for reading my opinion on the matter. I wanted to draw attention to this student loan interest deduction information so you our readers were advised and could perhaps take it into account when considering anticipated refunds, etc. As always with this more technical type of stuff, let me know if I am wrong in any way. As I said before, I am not a tax expert. Please do not rely upon this as tax, financial or any other type of advice. Instead seek a proper expert.
I want to know if people think my opinion is off base. So, please let me know: does anyone think I am really really wrong about this? I am sure plenty of people do and I’m looking forward to hearing about it. Truth be told, if my opinion is wrong, then I’m wrong, and perhaps you can persuade me and change my mind.
Thanks again to Jeff for writing in with the timely post idea. Everyone in the U.S., if you haven’t done so yet start getting those tax returns in they are due soon.