Tax Time – Why is the Student Loan Interest Deduction So Low?
I’ve been using the student loan interest deduction for several years now, but I have always done my taxes on-line, and so I never knew exactly what was affecting my taxes – I just typed in the figures I was asked for and left it at that. Well, this year I decided to do my taxes on my own and so have only now realized that the student loan interest deduction is a measly $2500.
Assuming that you qualify for the deduction (it is phased out after you reach a certain income level), and assuming a 5% interest rate on your student loans (which is being quite generous since while certain Federal loans are much lower, others are much higher and most private loan companies have higher rates as well), this means that you will only be able to claim 100% of your interest payments if your student loans are no higher than $50,000. This may be ok for some of those who only earned an undergraduate degree, but as soon as you add a graduate degree on top of this, this rate becomes laughable. I was able to deduct slightly less than 25% of what I actually paid in 2009.
To put this in perspective, most homeowners are able to deduct 100% of the interest they pay on their mortgages. In fact, prior to the Tax Reform Act of 1986, interest paid on ALL consumer debt was tax deductable. So while offering a tax deduction for interest paid on student loans might, on the surface, seem like a benefit that, however small, shouldn’t be complained about, when we compare what it is now to what it used to be, we are actually getting royally screwed. Incidentally, the Act above was also the only time in history when taxes on the rich were lowered while taxes on the poor were simultaneously raised. One more reason to hate Ronald Reagan.