How to Claim the Student Loan Interest Tax DeductionDecember 22, 2020
Student loan debt continues to burden millions of Americans, with the Federal Reserve reporting that outstanding student loans total more than $1.46 trillion.
One way to make this debt a little less overwhelming is to take advantage of the student loan interest tax deduction. While you can’t deduct your student loans on your taxes, you may be able to get a tax break for the student loan interest you paid during the year to help you maximize your tax return.
Do You Have to File Taxes For Student Loans?
Your student loans don’t have to be listed as income on your tax form. Because it’s a loan — and you’re expected to repay it — the IRS doesn’t consider it income.
Depending on the situation, you might have to pay taxes on a portion of money you receive for a scholarship, but student loans aren’t considered income.
Is Student Loan Interest Tax Deductible?
The interest you pay on your student loans might be tax-deductible if you meet certain conditions. Types of interest that qualify as tax-deductible interest include:
- Simple interest paid on your student loan.
- Capitalized interest that accrued while you were in school and then was added to your loan balance after graduation.
- Loan origination fees.
- Credit card interest if you’ve only used that card to pay for qualified expenses.
- Interest paid on consolidated and refinanced student loans.
Are Student Loan Payments Tax Deductible?
Actual student loan payments you make aren’t tax-deductible. Instead, the IRS only allows you to deduct interest payments you’ve made on your student loans.
What is the Federal Student Loan Interest Tax Deduction
The IRS may allow you to deduct up to $2,500 in interest you’ve paid on your student loans during the course of a year. If you’re eligible, you can take this deduction on interest paid on federal or private student loans. For information about applying this deduction to your taxes, speak with your tax advisor.
When you claim a tax deduction, it reduces your taxable income. It’s not the same thing as a dollar-for-dollar reduction in your tax bill, but by reducing your taxable income, you can see a smaller tax liability for the year.
How to Claim the Student Loan Interest Tax Deduction
The student loan interest tax deduction is what’s called an “above the line” deduction. With this type of deduction, you don’t need to itemize your deductions by filing a Schedule A form with your 1040. However, you still do need to file a Schedule 1, per the changes to the tax law passed in 2017.
In order to find out how much interest you paid during the year, pay attention to Form 1098-E. Each of your lenders will send you this form, and you can find how much interest you paid by looking at Box 1. Add the information to Schedule 1 after using the provided worksheet to figure your deduction, and you should be able to move forward.
Who Can Deduct Student Loan Interest?
You may be able to claim the student loan interest tax deduction if you meet one of the following conditions:
- You have taken the loan out for yourself.
- You’ve taken the loan out on behalf of your spouse.
- You have taken the loan out on behalf of a dependent.
As a parent, if your student is legally obligated to repay the loan, you can’t claim a student loan interest tax deduction, even if you’re helping with repayment. Additionally, if you’re claimed as a dependent on someone else’s tax form, you can’t claim this deduction. You also can’t claim the deduction if you’re married filing separately.
Who Can Be Claimed As a Dependent?
If you’re claiming the tax deduction based on a loan you took on behalf of a dependent, you need to make sure the IRS considers them such for tax purposes. In general, a dependent is someone who relies on you for financial support and can include children or parents, as well as other relatives.
However, if the person files a joint return with someone else, or if they make more than $4,150 on their own in a tax year, you can’t claim them as a dependent.
What Loans Qualify for the Interest Tax Deduction?
Not every loan qualifies you for the student loan interest tax deduction, so make sure your debt meets the criteria. Your loan must be used to pay for qualified expenses in order to be tax-deductible. Some of these expenses include:
- Tuition and fees
- Room and board
- Needed supplies and equipment (including a computer)
Both federal and private loans can qualify, as long as the proceeds from the loan are used for qualified education expenses.
Interest Tax Deduction Income Limit
The ability to claim the student loan interest tax deduction phases out as your income increases. Your income is based on your modified adjusted gross income (MAGI), which can be figured using the worksheet provided with your 1040.
Each year, the IRS updates phase-out levels. For example, in 2020 and 2021, once you make $85,000 as a single filer or $170,000 as a joint filer, you’re no longer eligible to claim the student loan interest tax deduction.
However, you may still be able to claim a partial deduction if you’re without the phase-out range. Your deduction will just be less valuable. Remember that those who are married filing separately can’t claim the student loan interest deduction.
Student Loan Interest Tax Deduction Phase-Out Range
|Filing status||Phase-out begins||Ineligible for deduction|
|Single, head of household, qualifying widow(er)||$70,000||$85,000|
Additional Tax Deductions for Students & Graduates
The student loan interest deduction isn’t the only way you can get a tax break for your educational pursuits. Some of the other tax breaks you might be able to claim include:
- Deduction for tuition and fees.
- Lifetime Learning tax credit
- American opportunity tax credit
Note that a tax credit is a direct reduction in your tax bill, so if you qualify for a credit, it can be more valuable than a deduction.
Refinance Your Student Loans to Save More
While the student loan interest tax deduction offers a way for you to reduce your taxable income, it’s not the only way to save money as you pay down your student loan debt. Refinancing your student loans could reduce your interest rate, allowing you to save money overall and pay off your student loan debt faster. Maximize your tax deduction and take other steps to improve your finances as you tackle your student loans.