How Administrative Forbearance May Affect Your Student Loan Interest Deduction

Update 12/22/2021: On Dec. 22, 2021, the U.S. Department of Education (ED) extended the student loan payment pause through May 1, 2022.

If you’re a student loan borrower who is used to getting a tax refund every year, 2021 might look a little different.

The administrative forbearance period instituted as a response to the COVID-19 pandemic has helped many borrowers stay afloat during an economic recession, but it also comes with some tax implications that shouldn’t be ignored.

Read below to see if administrative forbearance may have affected your ability to take the student loan interest deduction this year.

What is the Student Loan Interest Deduction?

The student loan interest deduction lets some borrowers deduct up to $2,500 in interest on both federal and private student loans. This deduction is available to all qualifying taxpayers, even those who take the standard deduction.

There are income limits for this deduction. Single borrowers whose modified adjusted gross income (MAGI) is less than $70,000 are eligible for the full deduction, while individuals whose MAGI is between $70,000 and $85,000 can only take a partial deduction. Borrowers with MAGIs greater than $85,000 do not qualify for the deduction.

Married couples with a MAGI below $140,000 can take the full deduction, and those with a MAGI between $140,000 and $170,000 will only be eligible for a partial deduction. The deduction is phased out completely for couples with a MAGI over $170,000.

Only married couples filing jointly are eligible to take the deduction. If you and your spouse file taxes separately, you won’t qualify. Also, you can’t use the deduction if someone else claims you as a dependent on a tax return, like a parent or legal guardian.

Can You Deduct Student Loan Interest if Your Loans Are in Administrative Forbearance?

What makes the student loan tax break different this year is that the federal government had an administrative forbearance in place for most of 2020. Borrowers with federal loans were not required to make payments starting in March 2020, and many took advantage of that option.

Because of this, many borrowers may not have paid as much interest as they normally do. This affects how much of a student loan interest deduction they can qualify for. Some borrowers may have paid so little in total interest that they won’t even receive a 1098-E form, which is the official tax form showing how much student loan interest you paid during the previous year.

This form is only sent to borrowers who paid more than $600 in total interest from each loan servicer. It does not mean that those who paid $599 or less do not qualify for the deduction. If your MAGI is below the limits and you meet the other requirements, you can deduct your student loan interest. You’ll just have to work harder to figure out how much you can deduct.

Log onto your online student loan account and calculate how much interest you paid in 2020. If you have student loans from different providers, make sure to check each servicer’s website.

Then, add up the amount of interest you paid in 2020 and double-check the math. This is the amount you can deduct on your taxes, up to $2,500.

How to Handle Student Loan Payments When Forbearance Ends

Currently, the administrative forbearance period is scheduled to end on September 30, 2021, and payments will resume in October. If you’re worried about affording your monthly payments in the fall, the following options may be available to you:

Switch to an Income-Driven Repayment Plan

Borrowers with federal loans can apply for an income-driven repayment (IDR) plan, which bases your monthly student loan payment on your income and family size. If you’re unemployed, furloughed or working reduced hours, your monthly payment may be as low as $0. Your loans will still remain in good standing, even if you’re not required to make a payment.

Here’s how income-driven repayment can help if you’re falling behind on your payments. Let’s say you owe $50,000 in federal student loans and earn $40,000 a year. Your monthly payment under the standard 10-year plan is $477, while payments under an IDR plan could be as low as $174.

Most income-driven repayment plans also offer loan forgiveness after 20 or 25 years, depending on the specific plan. Borrowers will have to pay taxes on that amount unless they qualify for Public Service Loan Forgiveness.

You can always switch back to the standard plan once you can afford regular payments again.

Apply for Student Loan Deferment or Forbearance

If you can’t afford the monthly payment on an IDR plan, the next best option is to apply for student loan deferment or forbearance. Both deferment and forbearance will let you skip payments for a certain time frame, usually around 12 months. Many deferment and forbearance programs have a 36-month limit. If you have subsidized loans, interest will not accrue during the deferment period.

You will have to manually apply for both of these programs and may have to provide proof of economic hardship or unemployment. After that, you’ll have to keep making payments until the government approves your application.

Ask for a Refund

If you made payments during administrative forbearance, you may be eligible to have those payments refunded. This will only apply to payments made after March 13, 2020. If you made payments with multiple federal servicers, contact them individually to request your refunds.

Even after you’re approved for a refund, it may take a few days for the refund to go through. Set a reminder to follow up with your loan servicer if you don’t see it after a couple of weeks.

Contact Your Lender

If you’re not sure what options you are eligible for, contact your lender. They can speak with you about your options, as well as the pros and cons.

Refinance Your Private Student Loans

Refinancing your private student loans to a lower interest rate or a longer term could result in lower monthly payments.* This could help to alleviate your cash flow problems and make it easier to afford your other loans. Contact ELFI today to be connected with a personal loan advisor who will walk you through the process.