This might be a bit of weird question:
So I started paying off my student loans last year. Obviously, the advice that I always hear is to pay off student loans as quickly as possible (with a financial safety buffer), which I've been procrastinating ngl.
However, when I did my taxes this year I got a nice boost from the student loan interest deduction which was nice, but I see that it only applies to paying off student loan interest NOT principle. And since this interest is based off the principle and rate, the larger higher interest rate loan contribute more to this.
Is there any way that these refund boosts play out for the better or am I gas-lighting myself into not throwing a lump sum at my loans?
Paying off loans vs tax deduction
byu/Watered_Down_Empathy inStudentLoans
Posted by Watered_Down_Empathy
5 Comments
The maximum student loan interest deduction is $2,500 and it has an income limit on the deduction.
It is not enough of a factor to impact your overall student loan repayment strategy.
If aggressive payoff makes more sense for you, I would not let the interest deduction impact my decision making on it at all.
When all of the stars align perfectly you get around $500-600 back from the deduction.
It’s foolish to spend $2500 to get back $5-600.
If we were in Octonovedecember-ish (it’s a real month) and you wouldn’t too badly hammered by the extra interest that accrues, I’d say do what I think you’re thinking to do. In late April/early May, I’d say no.
That deduction can be a nice bonus when you’re on an IBR plan with no hope of paying down principal. In fact, the student loan interest deduction when combined with RAP’s interest and principal subsidies can result in a negative interest rate for some borrowers (must have AGI under $30k). The deduction will also reduce your future IBR payments after recertifying.
But it’s not available to everyone and it’s small enough that it shouldn’t be a primary influence on repayment strategy. It’s really just something to be aware of when you’re trying to nickel and dime the government.
It depends on your loan balance and interest rate. Does the money you get back from the max deduction on your taxes exceed the extra interest that accrues from extending the repayment period? It’s kinda the same deal as repaying immediately if you have the lump sum of cash or parking the cash in savings/low risk investments and paying off slowly. If the interest you can earn is higher than the interest that you would owe, this makes financial sense. Parking the cash for 1% earnings while your loans sit at 6% would not. You’d really need to sit down and run the numbers to see if it makes sense in your situation.