I have encountered many people who seem to have the misconception that because you receive a tax deduction for interest paid on your student loans that it is better to keep your loans around and receive this deduction than to pay them off.
Nothing could be farther from the truth. Let us look at some numbers.
Let’s say you paid interest for the year of $2000.00. Let’s also assume that your tax rate is as high as 20% (which would put you in a decent tax bracket). So as you get to take $2000.00 dollars off your taxable income and now as a result pay $400.00 less in taxes. Which is great. Until you realize that to save that $400.00 you had to pay $2000.00.
So again here is what its like. If a friend called you up and said I will give you $400.00 but all you have to do is give me $2,000.00 you’d tell them they are off their rocker. So if you have the money to pay off your student loan, do it. Don’t fall into this trap and cost yourself money in what may seem initially to be a savings!