This time of year, I get phone calls from clients that have graduated college and are now looking at paying back the student loan.  Yes it is daunting. But take a look at it and let’s get started.

First – make a list of your student loans.

Name               Amount           Owed   Interest Rate    Government or Private

Total them up – Hopefully the number is not too shocking.  Any high interest rates?  Consider refinancing them.  We personally recommend  www.sofi.com.

Let’s get your plan started for paying them off. There are two trains of thought here. The first is to take the smallest loan and pay it off first. Then take the amount that you were paying on that loan and apply it to the next smallest loan, and continue until paid in full.  The second is to take the highest interest expense and pay that off, then when completed move to the next highest interest rate loan. This is referred to as a “debt snowball.”

Is the interest you pay deductible? The IRS has Publication 970, which lists the tax benefits for Education https://www.irs.gov/pub/irs-pdf/p970.pdf. You can deduct the interest paid, up to $2,500.  Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phase-out when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.

You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions.

You can claim the deduction if all of the following apply:

• You paid interest on a qualified student loan in tax year 2016;
• You’re legally obligated to pay interest on a qualified student loan;
• Your filing status isn’t married filing separately;
• Your MAGI is less than a specified amount which is set annually; and
• You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.

A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:

• For you, your spouse, or a person who was your dependent when you took out the loan;
• For education provided during an academic period for an eligible student; and
• Paid or incurred within a reasonable period of time before or after you took out the loan.

If your parents took out the loan or co-signed and make the payments, they can claim the deduction even if the child is no longer a dependent on their return. If your parent pays your loan, you can take the deduction and your parents cannot (no legal obligation).