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Money Monday - Student Loan Interest & Tax Deductions

Unless you've been living under a rock the last few weeks, you now know two very important things. One - never find yourself alone in a dark room with anyone from Hollywood. Two - there is a giant tax bill with the potential to really impact student loan borrowers for the foreseeable future. The tax code has some sweeping changes, but today we're going to focus on the student loan tax deduction. Keep in mind that the Senate and House still need to reconcile their bills, so the proposed changes are not concrete just yet.

Wait, Student Loan Tax Deduction?

What exactly is the student loan deduction? In short, today you can deduct your income subject to tax by up to $2,500. If you're in the 25% tax bracket (which you likely are) this is worth about $625 in tax refunds as you make your way through your tax return. The caveat here is that your modified adjusted gross income has to be less than $80,000 if filing on your own, or less than $160,000 if you are married filing jointly to qualify for this deduction. You're out of luck if you are married filing individually. No deduction for you! 

Bah. You Just Taught Me Something and Now it is Changing?

The proposed tax plan will eliminate the deduction for the first $2,500 in interest paid on student loans. The exchange is that your new standard deduction is going to be increased from $6,350 to $12,000 if single or from $12,700 to $24,000 if married filing jointly. Everyone can claim the standard deduction. Some will argue that this helps level the playing field. By eliminating the student loan deduction and increasing the standard deduction, the tax code is more fair to everyone. Namely, the people that didn't need to take out student loans that are unable to qualify for the deduction to begin with. Those poor souls. 

But doesn't that math work in my favor, you might ask. Before you could deduct $8,850 if you were single and maxed out on your student loan deduction. Now you can deduct $12,000. This is where things get a bit tricky, as a number of other deductions are being removed as well. These include deductions for medical expenses, moving, alimony, etc. The goal behind the bill is presumably simplification, so the net result will likely be a wash for many. At least specifically in terms of the student loan interest deduction.

So, What Do I Do Next?

To us, congressfolk taking the time to modify the tax code for student loans is a bit of a kick in the pants. We have an education issue and no amount of tax reform will help that. Student loan numbers are a bit terrifying. According to Forbes, there is over 1.3 trillion in outstanding student loan debt. This includes 44 million borrowers. The average college graduate is leaving college with debts of $37,172. Tax relief in any form isn't the answer here.

Interest on student loans is the killer. If you are average Joe with $37,172 in student loan debt, you're paying the government $2,584 a year in interest. If you are on one of the income based repayment plans there's actually a chance you could see your balance go up over the course of a year rather than down. It's actually a pretty beautiful system if you happen to be the government and want to guarantee that you'll have an income source to help balance your budget for years to come.

The best thing for you to do today is to see where your interest rates are on your loans. As of today, you can probably find a lender like Sofi offering rates as low as 3.250% APR. Any good student loan refinance company is going to let you do a pre-qualify process. This will allow you to tell the lender how much you need to refinance, and they'll get you a proposed rate without impacting your credit score. From there, you can make an informed decision on how to handle your finances. Average Joe could to save around $1,349 the first year alone on that $37,172 balance.

Refinancing shouldn't come with any fees, so watch out for any lenders that try to nickel and dime you. If you move government loans to a private lender to refinance, you'll also lose some of your income based repayment options. Refinance companies are required to disclose this. Ask any questions you may have as you talk to your loan provider.

At the end of the day, the government probably isn't going to fix your student loan problem in the foreseeable future. It seems likely that the student loan interest deduction will be coming off the table. Do yourself a favor and see if if you can save yourself some money. You may need that money to buy a ladder and escape to Mexico later.