Claiming Your Student Loan Interest Deduction and Other Student Loan Tax Tips

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Tax season can be a stressful time for anyone. However, understanding the ways in which you may be able to save money on your taxes through deductions might help to ease that stress. You may be wondering: Are student loans tax deductible? The answer to that is that, while the payments themselves aren’t deductible, the interest on student loans often is. That said, not all taxpayers will qualify for this deduction.

Here are four key questions about student loans, interest deductions and taxes which you’ll want to know the answer to:

How much student loan interest can I deduct?
Who is eligible to deduct student loan interest?
What are the income guidelines for a student loan interest deduction?
How do you calculate student loan interest deductions?

Plus…

Some other items to know about student loans and your taxes
Talk to a professional about student loans and your taxes

How much student loan interest can I deduct?

If you are eligible for the student loan interest deduction, the interest paid is deductible for the lesser of a) the interest you actually paid during the tax year for which you’re filing or b) $2,500.

The interest paid must be on student loans (either federal or private) used for qualified educational expenses, such as tuition, fees and supplies needed to complete your coursework. A qualified student loan that may be tax-deductible is one you took out for yourself, your spouse or a dependent.

Because this deduction is classified as “above the line,” you do not have to itemize your taxes in order to claim it.

Who is eligible to deduct student loan interest?

Per the IRS, you must fit every one of the following qualifications in order to deduct any amount of student loan interest. This is just your first step to figuring out if you qualify for the student loan interest deduction.

  • You paid interest on a qualified student loan during the tax year for which you are filing.
  • You are legally obligated to pay interest on a qualified student loan
  • Your filing status is not “married filing separately.”
  • Your modified adjusted gross income (MAGI) is less than a specified amount, which is set annually (more on that below).
  • You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return.

What are the income guidelines for a student loan interest deduction?

To qualify for the full interest deduction on your taxes for the 2019 tax year (the taxes you file in 2020 in other words), your MAGI must be less than $70,000 as a single filer ($140,000 for couples filing jointly). For incomes above $70,000, the amount you can deduct will be phased out, which means you can still deduct interest, but at a lesser amount. Once your MAGI is $85,000 as a single filer, or $170,000 for couples filing jointly, you are no longer eligible to deduct student loan interest on your taxes.

If you paid at least $600 in interest over the year, be on the lookout for student loan tax form 1098-E from your loan servicer. Form 1098-E states the amount of interest you paid throughout the tax year, and you’ll input that amount onto your main tax form, the 1040. You can make the process easier by using a service such as TurboTax or TaxACT, or by seeking help from a tax professional.

Your filing status Phaseout of deduction starts with a MAGI of: Not eligible for a student loan interest deduction if you have a MAGI of:
Single, head of household, qualifying widow(er) $70,000 $85,000
Married filing jointly $140,000 $170,000
Married filing separately Not eligible Not eligible

How do you calculate student loan interest deductions?

It’s important to understand that even though you can claim up to $2,500 as a student loan deduction, the actual amount saved on your taxes won’t be that much. The deduction is calculated based on the amount of interest you paid over the past year, as well as your income and tax bracket. The maximum amount it can lower your tax bill by is $550, as the benefit phases out in the 22% tax bracket.

You can use our student loan interest deduction calculator to calculate the tax savings you may see from student loan interest deduction, based on your unique situation.

Some other items to know about student loans and your taxes

Different borrowers will need different advice — here are some topics that may apply to you:

  1. You may be able to deduct credit card interest
  2. What it means for your taxes if you get student loan help from an employer
  3. Understand the tax implications of student loan default
  4. Refinancing and the student loan interest deduction
  5. You may have to pay taxes if you get student loan forgiveness

1. You may be able to deduct credit card interest

Interest charges on your credit cards might also be deductible if used toward qualified education expenses. The catch: Unless every item charged to the card is exclusively used for qualified expenses, you can’t write it off at all.

In general, it’s not a great idea to pay your student loans with a credit card. Here’s more on why you might want to avoid that option.

2. What it means for your taxes if you get student loan help from an employer

The CARES Act, a U.S. government response to the COVID-19 pandemic, contains a provision allowing employers to make tax-free student loan payments of up to $5,250 per employee, for the remainder of 2020. This may help when you file your 2020 taxes, if you have an employer who participates in this program.

For your 2019 taxes, filed in 2020, you should be aware that, if you received student loan payback assistance from an employer, it is possible that money will be considered taxable income.

3. Understand the tax implications of student loan default

If you stop making payments and default on your student loans, Uncle Sam could intervene and garnish your tax refund until your debt is paid off. Other federal payments, including for Social Security benefits, would also be at risk in cases of default.

It’s important to know that, as a result of the coronavirus crisis, the CARES Act allows for the suspension of federal student loan payments until Sept. 30, 2020. No interest will accrue during that time either, so this could have an effect on student loan interest deductions when you file for 2020. Private loans are not included in the CARES Act.

4. Refinancing and the student loan interest deduction

Student loan refinancing is one way you can consolidate your loans into one monthly payment and potentially get a lower interest rate, too. If you choose to refinance your student loans, you may wonder if your student loan interest is still eligible for tax deductions. The verdict? Most likely.

However, if you refinance for more than the original value of your student loans, and then use the additional amount for any other purpose aside from qualified educational expenses, you won’t be able to deduct any interest paid on the loan.

5. You may have to pay taxes if you get student loan forgiveness

Participating in an income-driven student loan-forgiveness program can be a serious way to save. However, you should be aware that you may owe a hefty tax bill once the loan is forgiven. This is because that forgiven debt may be considered income by the IRS. You can learn more about student loan forgiveness and taxes here.

Talk to a professional about student loans and your taxes

There are many nuances to student loans and taxes. For example, in 2020, due to the coronavirus-related tax filing date extension to July 15, you have a bit more time than normal to ensure you maximize your deductions. But when in doubt, talk to a tax professional about your situation to see if you’re eligible for educational deductions or credits. You can also go here to learn about education tax credits, which you may be eligible for if you’re still in school.

Andrew Pentis and Rebecca Stropoli contributed to this report.

The information in this article is accurate as of the date of publishing