# Pay off tax-deductable student loan, or line of credit?



## Islandguy (Oct 19, 2011)

I am trying to decide whether to pay off my student loan of $19,000, or my line of credit at $40,000. Both loans were needed to help my wife and I get our Master’s degrees, and now we are working and making a good salary. The student loan is at 5.5% interest rate, but is tax deductable. The line of credit is currently at 3.5%. 

I don’t understand how to calculate this equations to see how I can save the most money. We are hoping to pay between $3000 and $5000 towards these loans every month. If we put it all towards one, we will still pay about $250 towards the other. 

Currently, we will both make about $60,000 each this year. 
My calculations are 
LOC: 40,000 @ 3.5% = $1400 a year in tax
SL: 19,[email protected] 5.5% = $1045 in tax. Take 28% ($292) for tax deduction = paying $793

Any thoughts on this one?


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## the-royal-mail (Dec 11, 2009)

If you're paying a higher interest rate, you're paying more. Regardless of tax deductions. Pay that one first, to save yourself money in interest. At $3-5K/mo on the SL that one will be gone in no time anyway. Probably not even worth doing calculations beyond the simple ones you can do in your head. Eliminate the higher interest payment ASAP, then go after the next loan.


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## Homerhomer (Oct 18, 2010)

As mentioned with this rate of payment it really doesn't matter, however if you really want to make calculations and compare the savings you would need to make a comparison for the same principle amount (19K in your case), and interest on student loan is not a deduction from income, it is a tax credit, therefore your savings on this will be quite a bit lower than 28%. Your calculation also assumes the same principal throught the year, not the case since you will be decreasing it with each payment.

One thing that may make it easier is combining loans into one if possible.


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## Four Pillars (Apr 5, 2009)

the-royal-mail said:


> If you're paying a higher interest rate, you're paying more. Regardless of tax deductions. Pay that one first, to save yourself money in interest. At $3-5K/mo on the SL that one will be gone in no time anyway. Probably not even worth doing calculations beyond the simple ones you can do in your head. Eliminate the higher interest payment ASAP, then go after the next loan.


Not if the tax deduction is higher than the difference in interest paid on the two loans.


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## cardhu (May 26, 2009)

Student loans aren't tax deductible ... they're eligible for a tax credit, which is not the same thing. 

The suggestion to ignore tax effects is wrong. 

Having said that, the interest rates on your two loans are far enough apart that there is no way the tax effect would tip the scale. The value of the tax credit varies by province, so your net interest cost on the student loan depends on where you live. However, to bring the net (after tax) interest cost of your student loan down below the rate on your LOC, the tax credit would have to be over 36%, and no such tax credit exists in any province, for student loan interest. 

Therefore, focus your payments against the student loan unless and until the rate differential shrinks (ie. if the 5.5% rate is locked, but the 3.5% is variable, then a rise in LOC rate to 4.5% would reverse the conclusion).


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