I paid off two student loans from law school in December. As I took my victory lap, a casual remark by an acquaintance bothered me: “But what about the deduction for your student loan interest? Won’t you miss being able to take that?” † For the record, these were not the first loans that I paid off, nor will they be the last. While this uninformed person did not have student loans of his own, I started to think about those in law school who might not have thought about the impact of their newly-disbursed student loans.
In 2013, students from public law schools graduated with, on average, $84,600 in student loan debt. † Of course, most people also have undergraduate student loans to pay as well. Those with JDs from private law schools graduated with an average of $122,158 in debt. Others will have even more. Assuming a 10-year repayment plan and 3.75% interest, an individual with $84,600 of student loan debt will pay $847 a month and $16,982 in interest over the life of that loan. † It should be noted that student loan interest rates fluctuate wildly; I personally have had loans ranging from 2.12% to 7.5% interest. That individual will pay $3,000 in interest in the first year of repayment alone, and even more if he has undergraduate and bar study loans. The problems that face many recent law school graduates start here:
- A recent JD with both undergraduate and graduate loan payments will easily pay more than $2,500 in student loan interest. The deduction can be a drop in the bucket.
- A lawyer will not be able to take the deduction if his or her modified adjusted gross income is more than $80,000 (filing single) or $160,000 (married filing jointly).
- The deduction is phased out starting at $65,000 (filing single) and at $130,000 (filing jointly).
Because the deduction does not take into account the taxpayer’s debt-to-income ratio, a recent law student with $200,000 in undergraduate and graduate student loans who finds a job making $80,000 a year will make $2,000 a month in payments, be ineligible for most income-based repayment plans, and will not be able to take the deduction. † This poor hypothetical person should take advantage of any and all pre-tax retirement contributions to lower his AGI in order to qualify for the deduction and for income-based repayment plans.