Q&A: Refinancing an education loan

Dear Liz: You were asked a question about whether it would be wise to refinance a parent PLUS loan through a private lender and you said yes because the interest rates are so much lower. Doesn’t this ignore the benefit of the IRS tax credit? I figured out that my interest rate is effectively a couple of percentage points lower because I get a $2,500 tax credit every year.

Answer: As long as you’re refinancing with another education loan, the interest is still tax deductible. The deduction is “above the line” — meaning you don’t have to itemize to get it. The student loan interest deduction can reduce your taxable income by up to $2,500 if your modified adjusted gross income is less than $80,000 for singles and $160,000 for married couples filing jointly. The amount you can deduct is phased out at higher incomes and disappears after $90,000 for singles and $180,000 for marrieds.

If you’re not clear whether you’re refinancing into an education loan (rather than, say, a personal loan), you should ask your lender.

To clarify, it’s not always a good idea to refinance, even if you get a better rate. That’s because federal education loans have consumer protections that private lenders don’t offer. For example, you can pause your payments for up to three years if you lose your job or have another financial setback. Private lenders may offer hardship deferments, but typically those max out at 12 months.

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