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?.

Let’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…) :)

Related posts:

1. Leverage Part 3: Interest deductibility of the loan
2. Leverage Part 4: The Interest-Only Investment Loan
3. RRSP Loan Strategy: Pay off high interest debt with a big RRSP contribution