Read this post if you want to see the exact impact student loan debt and it’s interest has. Estimated read time 3 min.

Student loans are not low-interest loans. Even federal student loans have interest rates ranging from 4.45% for Direct Subsidized loans to 7% for Graduate PLUS loans. That means interest starts adding up quickly. This makes the student loan interest tax deduction extra appealing. But is that tax deduction juicy enough that borrowers should keep their student loan debt around? In short, no way. Let’s see why that is.

 

The maximum value of the student loan interest deduction

 

Last week’s post discusses the in’s and out’s of the student loan interest tax deduction and is worth a quick read if you want to brush up on the subject.

The most money a borrower can get back from the tax deduction is $625 each year if they’ve paid and deducted a maximum of $2,500 in student loan interest and are in the highest eligible tax bracket.

 

A borrower example

 

Let’s look at a borrower with $37,000 (the average debt for a 2016 graduate) of student loan debt. These loans have an average interest rate of 5%. The tables below compare repaying under the 10 year standard repayment plan or aggressively repaying that debt in 5 years. The borrower makes $60,000 per year. Their repayment schedule looks like this.

 

10 year repayment term	Interest	Deduction Value
	$10,093	$2,523

 

5 year repayment term	Interest	Deduction Value
	$4,894	$1,224

 

The borrower who chooses the more aggressive repayment term will be out of debt five years sooner and they will also pay 52% or $5,200 less interest than the borrower who repaid over 10 years. That’s enough money to take a long international vacation! The borrower will get $1,299 less back in the form of a tax refund. But if you look at the five year period both were paying interest their tax deductions earned about the same amount.

 

The financial picture

 

The tax deduction is great when you’re already repaying your student loan debt. It’s a helping hand and can give back up to 25% of up to $2,500 in student loan interest. That being said, it’s not a good enough incentive to keep your student loan debt hanging around.