3

Student loans generally have very low interest rates. Those interests paid work in your favor at tax time, for certain income and tax bracket group.

In the US, if you make more than what amount, it will be smart to get rid of your student loans?

7

Ignoring other factors, like being able to invest in other places with a higher return, it is never better to pay interest, no matter what the tax deduction. You get to deduct a portion of the interest, but are still out of pocket for the rest. Take a simple example, a $10,000 loan with a 1% simple yearly interest rate and a 30% marginal tax rate. You would pay $100 in interest on the loan. Come tax time, you would get to deduct 30% of the $100, or $30. So you still end up paying $70 in interest.

9

The deductibility of student loan interest (up to $2,500) is just an additional subsidy of the rate. You don't come out ahead -- you just get the government to kick you a few more bucks to pay for school.

Once you make $55,000/year, the deduction limit drops until $70,000 when you can no longer deduct. The income limits limits are higher for married couples. So if you make more than $55k, student loans become a progressively worse deal. This is detailed in IRS Publication 970.

Regardless of income, your goal should always be to retire student debt as quickly as possible. Many people just pay minimums and are saddled with debt for decades -- I have colleague still carrying student loan debt who now borrowing to send their own children to college!

Student loans have onerous terms associated with them and are like mortgages, except that at the end of the day you don't end up with a valuable asset.

  • I would argue that you do end up with a valuable asset, your education. It should allow you to earn significantly more than if you didn't go to college. As with any investment, you need to balance what you are getting (major, etc.) with the costs (tuition, interest rate, etc.). – KeithB Nov 8 '10 at 17:40
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    I don't think that is true anymore. Colleges are selling something more than education, which is why they build big fancy buildings and send out expensive mailers to market to students. Most kids at age 16-18 aren't sophisticated enough to make a rational choice about a tremendous capital outlay that may saddle them with debt forever. – duffbeer703 Nov 8 '10 at 21:09
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    "Your goal should always be to retire student debt as quickly as possible" - While this is generally sound advice, there may be a variety of cases where the loans were made on decent terms and someone with good enough financial discipline could use the money more effectively than just "paying off the debt". Subject to the availability of good investment returns, reasonable risk tolerance, inflation considerations, and individuals' tax situations, of course. – user296 Dec 1 '10 at 20:48
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Here is a post outlining the rules that will go into affect in 2011 unless the 2010 cuts are extended by Congress. It also outlines the adjusted gross income range at which the deduction phases out.

I would suggest to you that even if you are below that income range and inside the period during which this deduction applies, you'll want to carefully weigh whether or not this deduction is worth it to you. Balance the interest rate (even if low) against the tax savings and make sure that it is actually a net positive for you as opposed to not having that debt, if you can pay that off.

  • Note that this was updated after @justkt answer was posted, with the following (on the site for the cited link, but not replaced with anything): 12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the rate changes formerly discussed in this article have been superseded. However, the rest of this answer is still good advice! – Ellie Kesselman Nov 4 '11 at 22:32

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