Unsubsidized Student Loans

[John Valko]

I have a client that has children that both have a portion of their student loan being unsubsidized and have received bills for accruing interest on their student loans. Should they pay the interest off as they go, or should they both wait until they are through with school to start paying on these unsubsidized loans? They are both dependents. One has 1 year left to finish her degree, the other has 4 more years. If they pay the interest now, will there be some tax advantage to doing this now and would the advantage be to them or my client?

[Koss]

Interest

Are the parents liable for repayment?

In other words, did one or both parents co-sign the promissory note for the loan?

Need to know, because:

You can't take a deduction for student loan interest if you are not legally obligated to make the payments, and

a person claimed as a dependent by someone else can't take the deduction, either.

So if the parents are not liable, payment of the interest now may result in a complete loss of the deduction.

With that being said...

In most cases, I think the tax benefit of the student loan interest deduction is outweighed by the cost of the compounding of that interest. If they can afford to pay it now, they should. If they don't pay it now, the interest gets capitalized, and becomes part of the principal balance of the loan. There is a massive snowball effect...

BMK