The ridiculous thing about student loan interest writeoffs is that the people that need it the most, can't use it. The phaseout period begins at around $55k and ends at $75k AGI. At $75k you get nothing.

A person shouldn't take out $100k in loans unless they can make a 6 figure job. But people taking out $100k in student loans and owing $7k per year in interest, cannot write any of it off if they have a job making $100k.

Most graduate school programs end in May. This means that the first year after grad school, you have a partial year of employment, only working for about 6 months and even if you make $100k annually, it means you only made $50k that year, and are eligible for student loan interest writeoff! EXCEPT... payments aren't due for 6 months after you graduate. So they become due in December of that year. You get to write off 1 month worth of interest. Whooptee doo.

Let's use our FWF skills to game this system. Non-subsidized loans start accruing interest when they are dispersed. The interest becomes capitalized into the loan and you pay interest on the interest. Is there anyway to prepay capitalized interest for the deduction?

Lets say it's May, I graduate, and I work for 6 months. During this time, I live frugally, perhaps get a signing bonus, and I save up $15k to pay off the $100k of debt. From that $100k, $15k of it was capitalized interest accrued during the first 2 years of grad school. Can I put my $15k to paying off this capitalized interest specifically, get issued a 1098E that says I paid $15k of interest during this year?

maximum deduction is $2500 anyways

I have my student loans directly from the federal government through the Direct Loan program, so I can only speak to my experience with them; I don't know if it works this way with private lenders, too, but I suspect it may. Interest doesn't capitalize until you enter repayment. Any interest due builds up in a separate interest pool. You can see how much interest has accrued online. Any payments you make before you enter repayment get applied to the interest first, such that you can pay off 100% of the accrued interest. Assuming you qualify for the interest deduction, you could get to write off the entire payment because it all goes to interest.

Preach it brother! When will people realize that the tax code is so *hard* on people making 6-figure incomes, especially those that "perhaps get a signing bonus." I don't see how they can get by in America these days. They're really the ones that need the deduction the most. Not like those lucky people making average salaries well under 55k. Let's get the whole FWF community on board to think up ways of helping those downtrodden folks that don't qualify for the deduction...

tripleB said:juliox said:maximum deduction is $2500 anyways

$2500 more than you would get otherwise.

Maximum writeoff is $2500, and with the phaseout beginning at $55k, the most the deduction can be worth is $625.

Better to work during school and maximize the lifetime learning credit (maximum credit is 20% of 10k, or $2000), while lowering your eventual student loan bills.

also you can deduct any capitalized interest

pretty simple to do this: If you borrowed $1000, and your balance is now $1100, $100 is capitalized interest. Until the balance is $1000, the entire payment (principle (really capitalized interest) + interest) is deductable

If you have a federal loan, you can send a check with a note that it is to be applied to interest. They will apply it as you request.

If you have a private loan, you have to live with whatever the bank that holds it wants to do.