The Real Student Loan Interest Rate: Don’t Forget About Tax Deductions

Here’s an added wrinkle in the debate on federal student loan interest rates that has gone entirely unmentioned. Middle and lower income borrowers don’t actually pay the 6.8 percent interest rate on Unsubsidized Stafford loan or the 3.4 percent rate that is set to expire for Subsidized Stafford loans issued later this year. They pay something lower because the federal government rebates a portion of their payments in the form of a tax deduction. We at Ed Money Watch aren’t sure why this important point is largely ignored or dismissed in the policy debates.

Is it because the benefit is too limited to really matter to borrowers? Probably not.

The student loan interest tax deduction allows individuals making less than $60,000 a year, and those filling joint returns and making less than $120,000 a year, to deduct up to $2,500 in student loan interest payments from their taxable income.  Eligibility phases out for individuals earning between $60,000 and $75,000 or joint filers earning between $120,000 and $150,000. Moreover, it is an “above-the-line deduction” and is therefore available to all filers, including those who do not itemize.

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