One of the most infuriating things about obtaining a degree is the fact that it costs so much. There is no reason that tuition prices should be increasing so rapidly, yet every year they significantly outpace inflation. The silver lining, albeit a small one, is that student loan interest is deductible. Heres how that looks.
Itemizing Your Deductions or Taking the Standard Deduction
When you go to do your taxes, you have two options. You can itemize your deductions, or take the standard. It all depends on how much you are able to write off.
Itemized deductions means that you write off each item individually. If you have a mortgage, you can write off the PMI, the mortgage interest, and the state and local taxes that you pay. If you give to charity, every dollar you give is deductible (as long as they meet the proper non-profit status). If you donate goods to a thrift store you can write off all of those as well. Adding all of these deductions up may result in a large sum. If it is bigger than the standard deduction, then you ought to itemize in order to get the biggest discount possible.
The standard deduction, for a single taxpayer in 2015, is $6,300 (double that for married couples). So if you itemize everything, and your deductions come out to $6,299, then you are better off taking the standard deduction. Everyone gets to lop this amount off the top of their taxable income at a minimum.
Taking a Student Loan Deduction
The good news about student loans is that the interest you pay on those loans is deductible no matter what. If you have $500 in loan interest, and you take the standard deduction, then you can deduct $6,800. The caveat is that you can only deduct enough to offset your taxes by $2,500 (the amount you deduct looks different depending on your tax bracket).
So lets put this into perspective. The average student in 2015 has $30,000 of debt. The going rate right now is roughly 4.5% interest. This means that in the first year that student will pay roughly $1,300 in interest. In a 25% tax bracket that means a discount on the taxes of $325. Not too bad, but nothing that you want to hang on to your student loans for.
Pay Off Those Loans
Rather than keep your loans around for years simply because you get a discount on your taxes, pay them off! There is no reason to spend $1 to save 25 cents.
Paying off your loans is easy. You can use one of dozens of student loan calculators online, and you can figure out just how much money you will save in interest charges by paying your loans off early. It will end up being far more than the measly 25% (or less) that you save by deducting them from your taxes. You can scrimp and save, earn more on the side, or find a job that pays off your loans for you. You can pay them off, it just takes a little dedication.