If you have outstanding student loans, up to $2,500 worth of interest is deductible per year. There are income limits, though:
* If your income is no more than $55,000 in 2008, you can take the full $2,500 deduction. With income up to $70,000 this year, you can deduct a smaller amount of student loan interest.
* If you’re married, filing a joint return, you must have income no more than $115,000 for a full $2,500 deduction, Smaller deductions are possible with income up to $145,000.
Should you pre-pay the loan? That depends. If you have loans outstanding at 9 percent, say, and you can’t deduct the interest, it probably makes sense to prepay and draw down the balance.
On the other hand, some loans from a few years ago bear interest at only 4 percent or 5 percent. If you have such a loan, there’s no hurry to prepay, especially if some or all of the interest is tax-deductible.
