Did you know that you can claim student loan interest as a tax deduction? This option helps people all over the United States manage their incomes and taxes so they can repay their student loans in the allotted period.
If you paid at least $600 in interest on your federal or private student loans in the past year, you qualify for the student loan interest deduction on your taxes.
Student Loan Interest Tax Deduction: Details to Understand
The student loan interest deduction is a specific tax deduction, outlined by the Internal Revenue Service (IRS), that allows you to deduct the amount you paid in student loan interest from your taxes. Both federal student loans (provided by the U.S. Department of Education) and private student loans (obtained through banks, credit unions, or similar financial institutions) qualify for this income tax deduction.
This tax deduction allows qualifying taxpayers to have their tax burden reduced for a given year. The interest you paid on your student loans can qualify for the student loan tax deduction if:
- The interest was paid on a qualified student loan in a specific tax year.
- You, as the tax filer, are also the individual legally obligated to pay interest on the loan.
- You are a single tax filer or married filing jointly.
- You meet the income requirements.
- You are not claimed as a dependent on someone else’s tax return.
The interest accrued on student loans taken out during undergraduate, graduate, or professional programs is tax-deductible up to $2,500. Student loans cover expenses while you attended school, including:
- Administrative fees.
- Books and supplies for class.
- Room and board.
- Other costs like transportation.
Student loan interest tax deductions come in two forms: deducting the amount paid from your taxes (paying less on your tax return) or receiving a larger tax refund after filing. However, each comes with income requirements, including:
- The minimum qualifying income for the student loan tax credit is $4,150.
- You qualify if your modified adjusted gross income (MAGI) as a single filer is $65,000 or less.
- Your deduction is reduced as a single filer if your income is between $65,000 and $80,000.
- You will not receive this tax deduction if your income as a single filer is more than $80,000.
- Your deduction is reduced as a married filer with income between $135,000 and $165,000.
- You will not receive this tax deduction if your combined income as a married filer is more than $165,000.
The IRS adjusted the MAGI limits in 2018 to account for changes in income around the U.S. Employers will send tax information by the end of January so that you can file taxes for the previous year.
To find out how much interest you can deduct from your taxes, you can either contact your loan servicer directly or wait for this information to be sent to you in a separate tax form. The IRS requires federal student loan servicers to send tax information in Form 1098-E by the end of January. If you paid more than $600 on federal student loans, you will receive this form.
Many loan servicers for both federal and private student loans have online portals that allow you to access your Form 1098-E. You may need to request a hard copy of this form from a private loan servicer. You can also check your online loan account or call your loan servicer to find out how much interest you have paid so far throughout the year.
What Is Considered Student Loan Interest?
The student loan tax deduction helps taxpayers lower their tax burden, which can increase financial security and help borrowers pay down their loans. However, some exclusions for this deduction include:
- The money you pay toward the principal of your loan is not tax-deductible. If you make a payment larger than the required minimum, check how much went toward your interest payment.
- If you paid less than $600 in student loan interest, you will not receive a Form 1098-E, and you will not qualify for the deduction.
- As of 2019, you cannot claim more than $2,500 in interest payments.
- You cannot claim interest payments on a loan given by a close friend or family member.
- You cannot claim the tax deduction if you make more than the specified MAGI.
Although you cannot claim deductions for principal payments, there are payments on your loan that the IRS considers interest rather than principal payments.
- Loan origination fee: This is a one-time fee that the lender charges once the loan is made and disbursed. If the loan origination fee is spread out over the life of the loan and accrues like interest, you can deduct it as interest.
The fee should be included with interest amounts on your Form 1098-E, but you can double-check with your lender to be sure that this money is allocated correctly. If not, the IRS states you can use reasonable methods to allocate the loan origination fee as tax-deductible interest.
- Capitalized interest: If you defer or forbear your student loans for a few months or years, you can ask to have the interest capitalized into the principal of your loan. This capitalized interest will also accrue interest once your loan is out of deferment or forbearance.
The additional money is still considered interest you can deduct from your taxes rather than part of the principal, even though you technically pay it off at a slower rate than standard interest payments.
- Interest on revolving lines of credit: Using methods like credit cards to pay down your student loans allows you to take the accruing interest from these lines of credit and count it as a student loan interest deduction.
- Interest on refinanced and consolidated student loans: Both refinancing and consolidation are methods for simplifying how you pay your loans. They both also allow you to spread payments over more than ten years. The interest you accrue on these loans qualifies for a tax deduction.
You cannot include some things as interest, such as:
- Money paid toward an interest payment when you are not legally obligated to make this payment.
- Commitment fees, processing fees, or other payments for property or services from the lender that are included in the loan payment.
Are There Credits You Can Claim?
As long as you have student loans, you can claim $600 to $2,500 of interest as a tax deduction in that tax year. Considering interest can include voluntary payments, tax deductions may help borrowers pay off their loans faster, while also paying less in taxes.
The federal government wants graduates to pay off their student loans, and this tax deduction is one method of encouraging faster repayment. You may also be eligible for the lifetime learning credit (LLC) or the American opportunity tax credit (AOTC), which can reduce the tax burden for student loan borrowers.