In 1997 the deduction for student loan interest came back into play after being repealed in the mid-1980’s. It seems everyone knows someone that owes  six figures for their college education.

What makes this sad is  that even if they found their dream job within the field that they studied, the salary would not constitute the amount of money that they owe. When it comes to borrowing money its not so much the principle that makes it so hard to pay back but yet of course interest makes it disturbing to the borrower, especially when your first starting out in a career

What is the student loan interest deduction

Student loan interest is one of the  unsecured loans that you actually cannot walk away from.  It was less than a decade ago the Internal Revenue Service made a change to the student loan interest deduction. The former rules only allowed you to take the deduction within a certain time after  graduation. Under the current rules the deduction can be taken for an unlimited amount of time after graduation if you are paying interest. You can find the deduction on line 33 of the 1040, they call it an “above the line deduction” which reduces your adjusted gross income.

What can Washington do?

With all of the talk about tax reform, how about we look at things “one at a time”. We have quite a few credits that will actually give you money for somewhat no reason whatsoever. The child tax credit is the government giving away money for having children. Earned income credit is giving money  out to the poor. In one perspective, their is a social responsibility that was considered when these credit came about. Its nice to know the government will assist its citizens when they are in need however for some, their is an incentive to earn just enough and nothing more.

A reasonable solution

The student loan interest deduction  is not a credit its only a deduction. What if we told our children that we, as American taxpayers, are willing to foot the bill for the interest that our youth are paying? . Like the earned income credit, were the government can sometime give over $5000 to individuals depending on how many children they have and what  their income is (always worth a debate), we can give  graduating students the incentive to not be so frustrated when its time to payback their loans. The proposal would be to move the student loan interest deduction to a student loan interest credit. The credit would have phase outs  just like so many other credits and would balance compared to taking a deduction of the interest which only reduces taxable income.  In essence the interest you pay for student loan debt will be given back as a credit and not just a deduction, especially a deduction that might not benefit you.

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