How to Claim Student Loan Tax Credits and Deductions

student loan tax credit

If you owe student loan debt, student loans likely take a good chunk out of your budget, as the average monthly student loan payment for borrowers ages 20 to 30 is around $351 per month. Unfortunately, not all of the money you pay goes towards reducing your loan balance either — some of the money goes towards paying interest on your loans.

The good news is, the government gives most borrowers a little help with interest costs. While there are no student loan tax credits for borrowers who are repaying their student loans, there is a tax deduction for up to $2,500 in student loan interest that allows qualified borrowers to reduce taxable income. There are also a few credits you can take to help cover costs while you’re in school.

Read on to find out more about whether the student loan interest deduction or any of the available student loan tax credits could help you.

What are your options for claiming a student loan tax credit?

There are tax credits for education, but eligibility varies depending upon whether you’re currently in school and paying tuition or whether you’re out of school and already paying back student loans.

“There are credits and deductions available to people paying tuition in the current year,” Helena Swyter of SweeterCPA said in an interview. The Department of Education lists the two student loan tax credits that are available:

The American Opportunity Credit

The American Opportunity Credit (AOC) is worth up to $2,500 per student per year, but it can only be claimed for a maximum of four total tax years per student. There are specific qualifying requirements including:

  • The student must be attending school at least half-time for at least one academic term.
  • The student must not have finished the first four years of a post-secondary program prior to the end of the tax year.
  • The student must be pursuing a program that will end with a degree or other recognized credential.

Parents often claim this credit while their kids are in college. To claim the credit, parents or students should make sure they have Form 1098-T, which is provided by the school to report tuition received.

The Lifetime Learning Credit

This credit is worth up to $2,000 per year per student for tuition, books, fees, and supplies for any student pursuing college or career education. Students don’t need to be enrolled for a minimum number of hours to claim the credit, and there’s no limit on how many years the credit can be claimed.

Unfortunately, if you’re already out of school, you aren’t eligible for either of these credits even if you took out student loans to pay for education. “For student loans, there’s really just the student loan interest deduction, so it’s a much shorter list of options,” Swyter said.

Claiming the student loan interest deduction

If you’re already out of school, you might be eligible for a valuable tax deduction even though you don’t qualify for student loan tax credits anymore. “Every year, you can deduct up to $2,500 of student loan interest,” Swyter said.

More than 12 million borrowers deducted student loan interest on their tax returns in 2015, according to the most current IRS report. CNBC reports that close to 30% of all Americans with outstanding student loan debt took advantage of this tax deduction.

This deduction could save you hundreds of dollars on your tax bill, with Forbes reporting the maximum savings for claiming the deduction is $625.

However, it’s important to realize the deduction will save you less than a credit would. As the Tax Policy Center explains, deductions reduce your taxable income, while tax credits reduce the amount you owe in taxes. For example:

  • If you owed $1,000 in taxes and receive a $500 credit, you’d subtract the credit from your taxes due. Your new tax bill would be $1,000 (taxes due) – $500 (credit) = $500. Your savings is $500.
  • If you receive a $500 deduction and you’re in the 15% tax bracket, your taxable income is reduced by $500 and you save 15% on the money you didn’t pay taxes on. Your savings is $500 (the money you’re not taxed on) * 15% (your tax bracket). Your savings is $75.

How much can the student loan tax deduction save you?

The amount you’ll save if you claim the student loan tax deduction varies depending on your tax rate and the amount of student loan interest you deduct.

As CNBC explains, it’s classified as an “above-the-line” deduction. This means you don’t have to itemize your taxes in order to claim the deduction. You can directly reduce your taxable income by including the interest amount on your tax return.

“This deduction will appear on the front page of your tax return and reduce your Adjusted Gross Income — thus reducing your income subject to taxation,” Swyter said. If you had $40,000 in income but you claim the $2,500 student loan interest deduction, you’d only have to pay taxes on $37,500 in income. Since you pay taxes on less income, you reduce the total taxes you owe.

You can get a rough idea of how much you’ll save by multiplying the amount of student loan interest you can deduct by your tax bracket. If you paid $1,000 in student loan interest and you’re in the 22% tax bracket, you’d multiply $1,000 * 22% to determine that you’d save around $220.

If you want to find out exactly how much you can save, use our Student Loan Interest Deduction calculator.

This chart also shows how much you could have saved if you paid various amounts of student loan interest in 2016 and earned $40,456 annually (the median earnings for 25 to 34-year-olds in the third quarter of 2017 according to the Bureau of Labor Statistics).
student loan tax credit

Are you eligible to take the student loan tax deduction?

Whether you are eligible for the student loan interest deduction will vary depending upon your income, how you file your taxes, and whether anyone claims you as a dependent.

“There is an income limit for this deduction,” Swyter said. “If your modified adjusted gross income is over $65,000 for someone filing single or $135,000 for couples filing jointly, the deduction starts to phase out until it is completely eliminated at $80,000 for a single person or $165,000 for a joint return.”

You also have to meet other requirements. The IRS indicates you can claim the deduction if:

    • You paid interest on a qualified student loan: A qualified student loan is a loan that was taken out for you, your spouse, or any person who was your dependent at the time you took out the loan. The loan must have been taken out for educational expenses during an academic year and the interest that you are deducting must have been incurred or paid out within a reasonable time period before or after you took out the loan.
    • You were legally obligated to pay the interest that you paid. Your modified adjusted gross income was below the annual maximum at which the deduction phases out.

“People who file using the Married Filing Separately status cannot claim this deduction,” Swyter said. “If your parents (or anyone else) claims you on their return, you are also not eligible for the deduction.”

You can only take the student loan tax deduction when you’re paying interest on student loans that you actually used to pay for school-related expenses, according to TurboTax. Room and board during school counts; however, if you used any of your student loans to fund personal expenses not related to education, you must reduce your deduction so you aren’t deducting interest paid on this portion of your loans.

How to claim the student loan interest deduction

To claim your student loan tax deduction, you must be the legal owner of the loan. If you’ve made payments on a loan that isn’t yours, you won’t be able to take the deduction. However, the good news is, if someone else made payments on your loan for you, like a parent, you can take the deduction anyway.

To get started, you’ll need to know how much you paid and will need to fill in the right form on your tax return.

student loan tax credit

Image credit: IRS 1040 Form

“You should receive a form from your school or student loan processor (called a 1098-E) showing the total interest you paid for the tax year,” according to Swyter. You’ll input this amount on line 33 of your Form 1040. The deduction will reduce your taxable income, so your adjusted gross income in line 37 will be reduced by the amount of interest you paid.

How to make the most of student loan tax credits and deductions

To make the most of your student loan tax credits and deductions, be sure to claim any tuition credits you are eligible for while still in school. Once you graduate and begin paying interest, claim your student loan deduction in any year which you are eligible.

There’s never a reason not to claim student loan tax credits that you are eligible for, as you don’t want to pay more taxes than you need while trying to cover the costs of your education.

Stephanie Halligan and Miranda Marquit contributed to this article.

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