Write off the Interest on your Student Loan

The interest on your student loans are tax deductible in Canada (another way of saying "write off" is "deduct"). For more information on the definition of "writing off", please refer to my post – What is a tax write off?.

LearningGraduation.jpgLet’s take a look at an example. William is a young doctor, who has just finished medical school and has entered residency. He graduates with $150,000 in student loans (about the average for a new doctor these days). His loan is being charged 6.25% and he is allowed to only pay the interest while he is in residency (which means the balance of $150,000 does not go down!). William is okay with this since an average resident physician in Toronto is probably earning about $50,000-$55,000 in their first year or so.

Let’s figure out how much interest he is paying:

$150,000 x 6.25% Interest = $9,375 per year ($781.25 PER MONTH)

That is a lot of money to be paying just to carry a loan, never mind starting to repay it! Someone who is earning $50,000 in Ontario is in the 31.15% marginal tax bracket (see my earlier post on the definition of a Marginal Tax Rate here). So, in William’s case the math is as follows to calculate the benefit of writing off the interest:

$9,375 Total Interest Paid x 31.15% Marginal Tax Rate = $2,920.31 Back in his pocket

So in William’s case, by writing off the interest, he was able to get almost $3,000 back in his pocket! That’s a big saving. In a future post, I’m going to talk about how many students erroneously lose the ability to deduct the interest on their student loans without knowing it! You’ll want to read that one, because if the government spots it (and your name is Lucy) then they will say, "Lucy, you have some explaining to do!" :) (I hope everyone understands that reference…) :)

 




Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • john

    hey dont know about student loans but to write off your loan or car finance use http://www.claims.350.com/Unenforcable_loans.htm

    or

    http://www.claims.350.com

  • MilaRay

    Interest rates on student loans are exteremely high.It’s great that there’s an opportunity to write off the interest rate with a marginal tax bracket, but it’s still a big deal.If you have $150,000 of student loan then you should pay $ 9,375 and it’s just an interest rate, so with paying it off you do not pay off your debt.Of course, writing off the interest rate is a benefit, but anyway,studuying is really expensive and it’s hard to imagine how long it takes to pay off student loan off with such high interest rates.
    http://cashadvancesus.com/