IBR and deduction for student loan interest

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Tsispilos
Posts: 125
Joined: Sun Oct 12, 2008 3:37 pm

IBR and deduction for student loan interest

Postby Tsispilos » Fri Aug 20, 2010 2:32 pm

Okay income tax gurus, help me understand this. You can generally deduct interest from student loan payments, unless you're in the higher income brackets. If you're not in the higher income brackets, but have $200k+ in student loans, then you'll likely have to use IBR, and your IBR payments will never even cover the interest that accrues on your principal student loan. So, if that happens, can you just deduct your entire IBR payment? If you deducted all your IBR payments, wouldn't that affect how much your IBR payment is?

Tsispilos
Posts: 125
Joined: Sun Oct 12, 2008 3:37 pm

Re: IBR and deduction for student loan interest

Postby Tsispilos » Sat Aug 21, 2010 7:50 am

bumpbump

anli
Posts: 45
Joined: Sat Oct 04, 2008 3:09 pm

Re: IBR and deduction for student loan interest

Postby anli » Sun Aug 22, 2010 12:55 pm

The deduction has no effect on your IBR payment. If you incur $10,000 in interest and make $6,000 in payments, you are entitled to a deduction of $10,000. If yor marginal tax rate is 20%, your deduction is worth $2,000 and your net outflow on your loans for the year is $6,000 - 2,000, or $4,000. As you can see, the value of the deduction has nothing to do with the amount you pay, except to the small extent each year it affects your compound interest.

Perhaps your point is that if you are using IBR, you are in a low marginal tax bracket and the value of the deduction is therefore lower. This is correct.




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