Student Loan Interest Deduction

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By Jordi Lippe-McGraw

January 14, 2021

If you’re thinking about taking out a student loan (or have already got one that you’re paying back), chances are a decent chunk of each monthly payment you make will end up going towards interest.

Interest is calculated as a percentage of the amount you’ve borrowed when a lender gives you money, and it’s basically like a regular fee you’ve got to pay back for the privilege of getting to use a loan provider’s money.

Interest payments can be pretty frustrating. After all, sometimes student loan interest makes it seem like your student loan will take two lifetimes to pay back.

But there are some ways that you can bring the interest down on your repayment plan — and one of the easiest ways to reduce the cost of your debt is by using the student loan interest deduction.

This guide will explain everything you need to know about the student loan interest deduction, modified adjusted income eligibility criteria, how much this particular tax benefit is worth, and how you can claim it.

Is student loan interest deductible?

The short answer is: yes, it is tax deductible, thanks to something called the student loan interest deduction.

The student loan interest deduction lets borrowers deduct all or part of the interest they pay on their federal student loans and private student loans when they file and submit their annual federal income tax return to the Internal Revenue Service (IRS).

You can claim the student loan interest deduction even if you use the standard deduction. But, as you might have guessed, there are a few important rules around who is eligible, which kinds of loans qualify and how much you’re allowed to claim.

How does the student loan interest deduction work?

The student loan interest deduction is an above-the-line exclusion from income that you can use when filing your annual taxes with the Internal Revenue Service (IRS).

An above-the-line exclusion from income is also sometimes called an “adjustment to income” and it reduces the adjusted gross income (AGI) on your federal income tax return. As a result, it also reduces your taxable income for the year.

All you’ve got to do to claim student loan interest deduction is add the total amount of eligible student loan interest on IRS Form 1040. 

Student Loan Interest Deduction
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You don’t have to itemize loan interest payments to claim the deduction — but we’ll get to specific eligibility requirements and how to claim the deduction in a minute.

You should be able to receive this tax deduction for any interest that you paid on qualified college loans during the tax year, up to a total of $2,500.

If you paid less than $2,500 in student loan interest, the amount of your deduction is based on the total amount you paid. For example, if you only paid $1,500 in interest for a given tax year, your deduction is $1,500.

That means your taxable income will be reduced by $1,500.

Eligible loans

While the student loan interest deduction is a common tax deduction that applies to many borrowers, it’s important to remember that not all loans are eligible.

Eligible college loans include all federal student loans and most private student loans.

Examples of college loans that are eligible for the student loan interest deduction include:

  • Subsidized Federal Stafford Loan
  • Unsubsidized Federal Stafford Loan
  • Federal Perkins Loan
  • Federal Grad PLUS Loan
  • Federal Parent PLUS Loan
  • Federal Consolidation Loan
  • State Education Loans
  • Private Student Loans

Interest paid on federal student loan debt made through the Federal Direct Loan Program and the Federal Family Education Loan (FFEL) program is eligible.

Another point to bear in mind is that the student loan interest deduction is available to both student borrowers and parent borrowers. This includes Federal Parent PLUS Loan borrowers and private parent loan borrowers.

On the other hand, loans from someone who is related to you or loans from a retirement plan aren’t eligible for the student loan interest deduction.

The loan must be a student loan borrowed for you, your spouse or your dependent.

Qualified Educational Expenses

To qualify for the student loan interest deduction, the loan that you’ve taken out must also have been used solely to pay for qualified higher education expenses.

Examples of a qualified higher education expense will typically include things like:

  • College tuition fees
  • Housing and meal plans (i.e., room and board)
  • Textbooks
  • Supplies and equipment
  • Transportation to and from school

Mixed-use loans such as credit card debt aren’t generally eligible for this tax deduction. The only exception to this rule is when the loan you’ve taken out is used only to pay qualified education expenses (and absolutely nothing else).

The amount of qualified educational expenses must be reduced by the amount of qualified expenses used to justify other education tax benefits.

IRS rules prohibit double-dipping. Double-dipping occurs when a tax benefit is applied to decrease your tax liability using two or more tax deductions and credits. In the context of student loans, double-dipping would be when you use the same expense to justify two different education tax benefits. For example, the same qualified expenses cannot be used for the student loan interest deduction, the American Opportunity Tax Credit and a tax-free distribution from a 529 plan. 

The IRS won’t allow this, so when in doubt use each expense to justify only one tax benefit.

Eligibility criteria 

The student loan interest deduction is a fairly inclusive IRS deduction. 

But not every single borrower qualifies, so it’s important to double-check that you qualify for this student loan tax deduction before it’s applied.

You’re going to need to meet certain eligibility requirements to claim the student loan interest deduction. 

That criteria includes:

  • You’ll need to be legally on the hook to pay the interest on a qualified student loan. Borrowers and cosigners are legally bound to pay back student debt. A parent who voluntarily makes a student loan payment on their child’s loans can’t deduct the interest if they aren’t legally bound to pay the interest.
  • You must not be claimable on anyone else’s tax return. The student borrower may be able to claim the deduction based on the amounts paid by the parents, but only if the student cannot be claimed as a dependent on the parents’ tax return (or on anyone else’s tax return). If the parents could claim the student as a dependent but choose not to, the student still isn’t eligible to claim the student loan interest deduction.
  • Your tax filing status is single, married filing jointly, head of household or qualifying widow(er). Taxpayers who file their federal income tax returns as married filing separately aren’t eligible.

The student borrower will also need to satisfy certain eligibility requirements to claim the tax deduction. These requirements include:

  • The student must have been enrolled on at least a half-time basis. If the student is enrolled on less than a half-time basis, such as is common in continuing education programs, the student loans aren’t eligible for the student loan interest deduction.

The student must be enrolled in a program leading to a degree or certificate at an eligible higher educational institution. Eligible educational institutions are limited to accredited postsecondary institutions that are eligible for Title IV federal student aid.

 

Income phase-outs 

There is an income limit for the student loan interest deduction. So, you might be ineligible depending on how much you earn.

The income phase-outs are based on the taxpayer’s filing status and modified adjusted gross income (MAGI). The amount of the student loan interest deduction is reduced proportionately within the income phase-outs and eliminated entirely when income exceeds the upper end of the income phase-outs.

Tax Filing Status

Income Phase-outs (2020)

Single

$70,000 to $85,000

Head of Household

$70,000 to $85,000

Qualifying Widow(er)

$70,000 to $85,000

Married Filing Jointly

$140,000 to $170,000

Married Filing Separately

Not eligible

How much is the deduction worth?

You find out the good news that you’re eligible. Great! But, how much will it actually save you? Well, it’s important to note this is an above-the-line deduction, not a tax credit. So, it only helps you reduce your taxable income.

For example, suppose you have $60,000 in taxable income last year and paid $2,500 in student loan interest. Since your income is below the income phase-outs, the student loan interest deduction is not reduced. Your taxable income would become $57,500. This then reduces your tax liability.

To understand how much that will ultimately save you on your tax bill, multiply the amount student loan interest you’re eligible to deduct by your tax bracket.

If you are single and your modified adjusted gross income is $60,000, you are in the 22% tax bracket. If you paid $1,000 in student loan interest, which is about the average deduction, the student loan interest deduction will save you about $220. The maximum anyone might save is $550.

How do you claim a student loan interest deduction?

Luckily, claiming a student loan interest deduction is relatively easy since you don’t need to itemize your taxes to qualify.

If you paid more than $600 in student loan interest to a single lender, you should automatically be sent a copy of IRS Form 1098-E from your student loan provider. 

This form states how much you paid in interest on a given qualified education loan.

But if you don’t get sent a 1098-E form from your lender, don’t panic. Typically, all you’ve got to do is call them and ask for confirmation of the total amount that you paid in student loan interest for that tax year. 

Student Loan Interest Deduction
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You may also be able to access this information by logging into your account on the lender’s website.

Although your lender should be able to provide you with the correct amount of interest paid, the IRS asks borrowers in the instructions for their 1098-E not to contact their lenders for explanations of the requirements and how to make an allowable deduction for interest paid. 

Instead, that information is all available on the IRS website. But fortunately for you, it’s actually super simple to claim.

Once you’ve got the correct amount, all you need to do is enter that number on line 20 on Schedule 1 of IRS Form 1040 before submitting.

Summary

College is expensive as it is. Adding loan interest on top of your other educational costs can make a huge difference in how much you have to pay and how long it takes for you to become free of debt. 

By taking advantage of the student loan interest deduction, you can reduce these costs and put a little bit of money back into your pocket every year.




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