How To Claim the Student Loan Interest Deduction
Is student loan interest deductible? Yes it is. If you took out student loans to cover educational expenses, you might be eligible for the student loan interest deduction.
In fact, this tax break could allow you to deduct up to $2,500 of paid interest from your annual taxable income.
Here are some key questions to answer about the student loan interest tax deduction and how it can potentially put extra dollars back in your pocket:
- How is student loan interest deductible?
- How does the student loan interest deduction work?
- Do you need to itemize to deduct student loan interest?
- How much can taking the deduction save you?
- What should you know about income limits?
- When do you get your student loan interest form information?
- Plus: Additional tax breaks to consider
Student loan interest is tax-deductible if you meet the following requirements:
- You took out the student loan for yourself, spouse or dependent. The tax deduction is available for both federal and private student loans in your or your spouse’s name. The deduction also applies to Parent PLUS loans used to pay for your child’s education.
- You used the loan to cover educational costs. Your student loans must go toward school-related expenses during the academic year, such as tuition, books, transportation, and room and board.
- You were legally obligated to repay the loan. You can’t deduct the interest for contributions to your child’s student loan since it’s not in your name.
You’re ineligible for the student loan interest deduction if you’re married but filing separately. In addition, you can’t be listed as a dependent on someone else’s tax return if claiming the deduction for yourself.
If you meet the eligibility criteria, the maximum amount of interest you can deduct per year is $2,500.
This is a deduction, not a credit, which means you subtract the amount of deductible interest from your taxable income. For example, if you had $70,000 in taxable income last year and paid $2,500 in student loan interest, your deduction would reduce your taxable income to $67,500. However, paying more than $2,500 in interest doesn’t increase the deduction.
Deductions differ from tax credits — which directly reduce the taxes you owe. If you’re still in school, you may be eligible for educational tax credits — more about this later.
The student loan interest deduction is an above-the-line tax deduction, which means the deduction directly reduces your adjusted gross income.
If you plan on using the standard deduction, you don’t have to worry about missing out on the student loan deduction — you can take both. And of course, if you do itemize your deductions, you can still take the student loan deduction.
The student loan interest deduction value varies based on your income and tax bracket.
Estimate your deduction’s worth by multiplying your deductible interest by your federal income tax bracket. For example, if you made $65,000 in the last tax year, your income will be taxed at the 22% rate. With the $2,500 deduction, your federal tax refund would increase by $550 ($2,500 x 0.22).
However, the calculation becomes more complicated if your deduction causes you to drop to a lower income bracket.
You can figure out your potential student loan interest deduction with the IRS Publication 970 worksheet. You can also search online for student loan interest deduction calculators to help ease the task.
The student loan interest deduction gradually phases out at higher incomes. Here’s a quick overview of the limits based on your filing status and modified adjusted gross income (MAGI):
- Single, head of household or qualifying widow(er): Your deduction starts to decrease once your MAGI hits $70,000. If your MAGI exceeds $85,000, you can’t get the student loan interest deduction.
- Married, filing jointly: Your family’s MAGI must stay below $140,000 to receive the full deduction; after that, it decreases. If you and your spouse make more than $170,000 combined, you aren’t eligible for the student loan interest deduction.
Your student loan servicer will send you a 1098-E form if you paid at least $600 in student loan interest. Expect to receive this form by the end of January — if not, reach out to your loan servicer. You can still claim interest payments less than $600 provided you get the exact amount from your loan provider.
Online tax programs will prompt you to provide the necessary information when you file your taxes. The pertinent info is listed in box #1 on your 1098-E form: Student loan interest received by lender.
The government offers certain educational tax credits if you’re currently enrolled in college and paying for school-related costs. Here are some ways to potentially lower your tax bill:
American Opportunity Tax Credit (AOTC)
You could claim the American Opportunity Tax Credit (AOTC) if you paid for qualified school-related expenses for an eligible student enrolled at a postsecondary institution. The American Opportunity Tax Credit has an annual cap of $2,500 per student and can only be received for the first four years of your higher education. You’ll receive a percentage of what you’ve spent: 100% for the first $2,000, then 25% for the next $2,000.
Similar to the student loan interest deduction, the IRS imposes specific eligibility requirements and income limitations for the AOTC.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) provides a credit of up to $2,000 per tax return for educational expenses. Students must be enrolled in an eligible undergraduate, graduate or professional degree course, which includes programs designed to help learn new job skills.
Unlike the AOTC, there is no limit to how many years you can receive the LLC. Form 8863 is needed to claim either the AOTC or LLC. And although you can claim all three benefits on the same tax return (student loan interest deduction, AOTC and LLC), they can’t be for the same student or expenses.
College savings plans
You can unlock additional savings with a 529 college savings plan. Basically, this account acts like an investment account, allowing your money to grow tax-free. Furthermore, certain states offer matching grants up to a specified amount.
You shouldn’t face any penalties if you apply the funds to qualified education costs. And if you or your child decides not to attend college, you have the option to switch beneficiaries.
You can also encourage family and friends to contribute toward your student loan payments via the Gift of College platform and crowdfunding tools.
Credit card interest deduction
If you use your credit card for qualified educational expenses, you might be able to deduct the interest you paid. However, every charge on the card must be for school purposes, otherwise you can’t deduct anything.
More importantly, credit cards tend to charge a much higher interest rate than student loans. If you find yourself racking up charges, you might want to consider a private student loan instead.
Also, refinancing your existing student loans might help secure a lower interest rate. However, it’s not advised to refinance federal student loans since you’ll lose access to government benefits like income-driven repayment plans and student loan forgiveness programs.