In the United States, a student loan interest tax deduction allows you to deduct whichever is less – $2,500 (the maximum) or the amount of interest you paid during the year – on qualified student loans. If your federal or private student loans included at least $600 in interest in the past year, you also qualify for a student loan interest tax deduction.
Prepaid interest payments, as well as required interest payments, are included in this deduction. As you repay your loan, though, the deduction is reduced as your modified adjusted gross income (MAGI) reaches the annual limit for your filing. Student loan interest is deductible if your MAGI was less than $70,000 in the last tax year.
If your MAGI, however, falls between $70,000 and $85,000, you can still receive a deduction, but it will be less than $2,500.
Student loan interest is subtracted from your taxable income.
The IRS offers a formula to help determine how much you can claim as a student loan interest tax deduction. Your loan provider typically will send a form indicating how much interest you paid during the past year, which can be checked against the IRS’ formula.
What the Deduction Does
The student loan interest tax deduction reduces the tax burden for qualifying taxpayers for a given year. The interest you paid on your student loans can qualify for this deduction if:
- You meet the income requirements.
- You are not claimed as a dependent on someone else’s tax return.
- You are either filing as a single individual or are married and filing jointly.
- You are the individual legally obligated to pay the interest on the loan.
- The interest was paid on a qualified student loan in a specific tax year.
Eligibility for Student Loan Interest Deduction
To be eligible for a student loan interest tax deduction, your student loan has to have been taken to pay for qualified educational expenses and can’t be from a related person or made under a qualified employer plan.
Students eligible for the student loan interest tax deduction must be:
- You or your spouse.
- Your dependent (either a qualifying child or relative).
- Enrolled at least part time in a program leading to a degree, certificate, or another credential at an eligible institution.
Loans you’re forced to repay, loans borrowed for someone else’s education, and loans taken out for your own education are all qualified loans.
To explore whether you are eligible, this interactive tool will guide you through a series of steps to determine if you can receive the student loan interest tax deduction.
Qualified Educational Expenses
Qualified educational expenses include tuition and fees, room and board, books, supplies, equipment, and other necessary expenses like transportation.
Room and board is qualified as an expense if it isn’t more than the educational institution’s cost of attendance or is the actual amount charged to the student living in school-owned or -operated housing.
Eligible Educational Institutions
Eligible educational institutions are typically accredited public, nonprofit, or proprietary colleges, universities, vocational schools, or other postsecondary educational institutions. Regarding the student loan interest deduction, institutions conducting an internship or residency program prior to a degree or certificate – such as that from a higher education institute, hospital, or health care facility offering postgraduate training – is eligible.
Understanding Your Deduction
Student loan interest tax deductions are made two ways: by deducting the amount paid from your taxes, or by receiving a larger tax refund after filing your taxes. To qualify, you have to meet certain income requirements:
- Your individual, single-filing MAGI is $70,000 or less
- Your income is between $70,000 and $85,000 (those with an income greater than $85,000 as a single filer are not eligible)
- If you are filing as married, your income is between $130,000 and $160,000 (those with an income greater than $160,000 are not eligible)
Student Loan Interest Deduction by the Numbers
When looking at the student loan interest tax deduction by the numbers, there are many variables to consider.
Student loan interest is calculated based on the student loan. With a deduction limit of $2,500 a year, you need to have a student loan balance of more than $50,000 before reaching the maximum deduction limit.
Your tax bracket determines how much you will save. For example, for a single individual earning $60,000 annually, the top tax rate is 22%; by deducting $2,000 in student loan interest, the individual saves 22% of the $2,000, which comes out to $440.
Although $440 may not seem like much, there are 48 million Americans repaying student loans, and any deduction adds up over time. By allowing the interest paid on your student loan to be counted against your income for that year, it reduces the amount of money you are taxed on.
What to Know About the Deduction
What you should know about the deduction is that even if you do not itemize deductions on your tax return, you can claim the student loan interest tax deduction by filing the IRS Schedule 1 form.
The time you are permitted to take to repay federal and private loans can range from 10 to 30 years based on the type of loan, the repayment plan you choose, and the amount you owe, which all impact your interest rates. While there are income restrictions, there is no time limit for how long you can claim the student loan interest tax deduction. As long as you are paying for your loan and interest, you can check to see if you qualify, and if so, file for the deduction.
Repaying Your Loan
Once you begin repaying your loan and meet the requirements, you can take advantage of the student loan interest tax deduction. However, before repaying your student loans, you should look at your outstanding debt first.
If you have a credit card balance with 24% interest and a student loan with 6% interest, your credit card balance is typically going to cost you the most money due to compound interest, where you’ll pay interest charges on top of your existing accrued interest each month.
By paying off the debt with the highest interest rate first, you can save more over the long term.
If you can make payments while in school, you can reduce the interest you will have to pay back over the life of the loan.
If, after school, you are employed by the federal, state, local, or tribal government, or by a nonprofit organization, you might be eligible for the Public Service Loan Forgiveness (PSLF) program.
For direct loans and Federal Family Education Loans (FFEL), there are eight federal plans to help with repayment, half of which include loan forgiveness after 20 or 25 years.
Beyond the student loan interest tax deduction, there are other tax breaks available for higher education students, including the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit, and a 529 Plan.
As you pay down your student loans and explore your eligibility for the student loan interest tax deduction, it is important to make sure you are paying your student loans through your ideal plan. There are many different options available, as well as different programs providing assistance. Most individuals who have sought higher learning carry federal, private, or both federal and private student loans.
At College Finance, we offer tools to help you form a repayment plan for your student loans, so you can stay informed as you pay back your student loans while enrolled in classes or upon graduation. Browse our latest guides and articles for more information.