I think almost every week I hear someone who makes over $70k a year mention their wonderful student loan interest tax deduction. It’s time to take a few minutes to educate the masses about the student loan interest. Plain and simple, if you make a good wage you will not qualify for the student loan interest tax deduction.
Student loan brokers make a big deal about the wonderful tax benefits of student loans while leaving out the kicker that as soon as you start to make a good wage (which is the point of college, now isn’t it?) that you no longer qualify for the deduction. This is especially true if you live in an area that pays higher wages overall.
For 2007, the amount of student loan interest that you can take as a tax deduction is the lesser of $2,500 or the actual interest amount you paid during the year. This is another good point as many graduates will pay much more than $2,500/year in interest payments on their student loans. Many don’t realize that their tax deduction for the interest is limited to the $2,500 maximum.
Beyond that, in 2007, if you are single and your income exceeds $55,000 you will start to lose some of the deduction (phase-out). If your income hits $70,000 or more, you will get no deduction for student loan interest. These phase-out amounts double for married tax filers.
The ironic thing is that the amount of student loans you have often correlate to the amount of wages you receive upon graduation.
Doctors and lawyers, for example, tend to have higher student loan balances right out of school, but also far more income than would qualify them to take a deduction. This is the Catch 22 of the student loan interest tax break. Of course, another way to look at it is that this is the government’s way to help those who had larger student loans but are not making a larger income to cover the loan payments.
The income phase-outs for this tax deduction are adjusted periodically for inflation. The phase-outs really apply to your Modified Adjusted Gross Income (MAGI) but for most people this would just be your gross taxable income. The only obvious way to bring this amount down would be to make a deductible IRA contribution, which may help if you are on the edge of the income limits.
I am sure no one makes a decision to run up student loan debt based on the wonderful tax benefits. However, as with any tax break, take the time to educate yourself when you are considering the different tax benefits of different courses of action.