Did you know that the total amount of student debt in the U.S. is $1.73 trillion? The national average for student loan debt is $28,950.
Many Americans choose to invest in their education in order to have more opportunities in the future. However, higher education has been getting more and more expensive over the years. In fact, one report found that college costs have risen almost five times the rate of inflation.
This means that many students or their parents have to take out loans in order to finance their education. These loans must be paid back with interest, meaning that many people pay back even more than the money they borrowed.
Is your student loan tax deductible? How about the interest you paid on your student loan? Let’s take a look at everything you need to know.
Is a Student Loan Tax Deductible?
Making student loan payments can be a heavy burden. When tax time rolls around, you might wonder if your student loan is tax-deductible. While you can’t deduct the entirety of your student loan payments, Uncle Sam does cut you a break when it comes to the student loan interest that you’ve paid over the year.
However, this is only the case if you meet certain qualifications.
On top of that, there are additional tax breaks you might be eligible for as a student. This is also true if you are a parent paying for your child’s tuition and school expenses. We will discuss some of the other tax credits and breaks that you might qualify for further on in the article.
What Is the Student Loan Interest Deduction?
Each year, you are allowed to write off up to $2,500 that you paid towards interest on your student loans. This isn’t a tax credit. Instead, it’s a deduction.
That means that it doesn’t reduce your tax bill but instead reduces your taxable income.
Basically, let’s say that you earned $50,000 this year. If you are eligible for the full student loan interest deduction of $2,500, this amount would be subtracted from your income. This means that instead of paying taxes on $50,000, you are paying taxes on $47,500.
Of course, you might also qualify for a number of other tax deductions. This can help you decrease the amount of money you are paying taxes on even further.
Whether or not this student loan interest deduction is particularly helpful in lowering your tax bill has to do with whether or not it pushes you into a lower tax bracket. If this is the case, it can reduce the percentage of money the government requires that you pay. However, it can still save you a few hundred dollars each year even if it doesn’t change your tax bracket.
What Should I Know About Eligible Student Loan Interest Payments?
There are a number of criteria you need to meet in order to be eligible for the student loan interest deduction. In order to qualify, the following will need to be true:
- During the tax year, you paid student loan interest on a qualified student loan
- You file taxes as single, married filing jointly, qualifying widow or widower, or head of household
- You can’t be claimed as a dependent on someone else’s tax return, and if you’re married, neither can your spouse
- The loan is in your name or in your spouse’s name if you’re married
- Your modified adjusted grouse income must be less than $135,000 for married couples filing jointly or $65,000 for single filers
Let’s take a minute to look at what exactly Modified Adjusted Gross Income means. This is commonly referred to as MAGI. There is also a term adjusted gross income, or AGI.
Your AGI is the resulting number from subtracting your deductions from all of the income you earned. These deductions include:
- Health savings account contributions
- Student loan interest
- Half of self-employment taxes
- Retirement contributions
- Tuition and fees
When you add certain deductions back in, however, you are left with your modified adjusted gross income.
You will qualify for the full student loan interest tax deduction if you are filing as one of the above-listed types and your MAGI is below $65,000. The same is true if you are filing jointly as a married couple with a MAGI under $135,000. Of course, this assumes that you did pay at least $2,500 throughout the year in the form of student loan interst.
If your MAGI is above this threshold, it becomes a bit more complicated. There is still a chance that you are eligible for a student loan interest deduction. However, how high your modified adjusted gross income is will impact how much of a deduction you receive.
You can determine how much of a deduction you receive. The formula for doing so is subtracting $65,000 from your MAGI as a single person or $135,000 if you are married filing jointly. You will then need to divide the resulting number by $15,000 for single people or $30,000 for married couples.
The next step is to take either the maximum deduction or the total student loan interest you paid during the year, whichever is less, and multiply it by the number you found above.
Finally, you will subtract this number from $2,500 or the total amount of student loan interest you paid, whichever number is lower.
This will leave you with the amount of money that you will be able to write off on your taxes for student loan interest.
How Can I Claim the Student Loan Interest Deduction?
You will receive a 1098-E form from your lender if you paid more than $600 in student loan interest during the tax year. This form will show you the total amount of student loan interest you paid during that year. This figure will be listed in Box 1.
If you don’t receive this form because your student loan interest wasn’t high enough, you still can get a deduction. However, you’ll have to do the math yourself and figure out how much interest you paid during the tax year.
You can also ask your lender if you aren’t sure how much you paid. It’s important to save documentation you have about the interest you paid. You will need those records to prove that you made a legitimate deduction if you are ever audited.
When you fill out Form 1040 to pay your taxes, Line 33 is the spot to enter your total deductions for student loan interest. Tax filing software will typically prompt you to fill out this field. This type of software will also usually do the math for you if your MAGI is higher than the stated eligibility standards.
You are free to itemize your deductions to claim this deduction. However, it isn’t necessary.
What Other Deductions or Tax Credits Can Students Claim?
There are additional tax breaks that students and their parents might be eligible for. It’s worth knowing about some of the tax credits available to this segment of the population. Rather than being reducing your taxable income like deductions do, tax credits directly subtract from how much you owe in taxes.
(Do you also have a side hustle on top of being a student? Depending on what you do, you might have to file small business tax forms. You can learn about these tax forms in this article.)
Lifetime Learning Credit
This is a tax credit that provides students with a potential credit of $2,000 per return. This is a credit for school-related expenses and qualified tuition. Students must be enrolled in a post-secondary institution that is eligible under the tax credit.
The expenses here refer to those used to pay for course toward a profession degree as well as undergraduate or graduate education. Taxpayers can claim this credit for as many years as they are eligible to receive it.
The criteria an individual needs to meet to qualify for this credit are:
- The taxpayer is either the student, a dependent claimed on a tax return, or their spouse
- Qualified higher education expenses are paid by the taxpayer, another party, or their dependent
- A qualified student is enrolled in an eligible institutions and this is paid for by the taxpayer, another party, or their dependent
It’s worth noting people with MAGIs over $80,000 for single filers or $160,000 for married filers might not receive this full credit anymore. As of 2021, the allowable amount for this tax credit is being phased out.
American Opportunity Tax Credit
This is a tax credit with a maximum of $2,500 per student for each year. This is a credit for eligible expenses that are paid for at the level of higher education. Students must be at a qualified post-secondary institution in the first four years.
The way this works is that the first $2,000 spent in expenses is returned as a 100% credit. For the next $2,000 spent, however, only 25% is covered.
The allowable amount is also being phased out for this tax credit for those above a certain MAGI.
(It’s important to have a holistic picture of your tax situation. If you’re interested in learning about some of the taxes you are required to pay in addition to income tax, take a look at this guide.)
Student Loan Payment Suspensions
Due to the outbreak of the coronavirus pandemic, there is also a suspension of federal student loan payments. This occurred in March of 2020. This action of President Trump made it so federal student loan payments were suspended without interest.
This was then extended by President Biden when he was first in office. The suspension of federal student loan payments was extended to September 30, 2021. He again extended this deadline twice more.
There is a suspension of federal student loan payments through May 1, 2022.
It’s important to understand that this doesn’t have any impact on private student loans you might have. Additionally, you might not be able to deduct student loan interest if you have not been paying interest on your student loans.
Biden also signed the American Rescue Plan in March 2021. This law states that all forms of student loan forgiveness are tax-free if they occurred between January 1, 2021, until the year 2025.
College Savings Plans
You also might want to know about the tax benefits you can gain from college savings plans. A 529 Plan is a savings plan that parents can use to save money for their children’s education. This type of savings plan offers a number of tax advantages and even applies to K-12 programs at religious, private, and public schools as of 2017.
Have you been working as a freelancer while you’ve been in school? If so, it’s important to understand that there are deductions you can claim as an independent contractor, too. Check out our guide here.
Can a Child Take the Interest Deduction If the Loans Are Paid By the Parent?
In order to deduct student loan interest from your taxes, you must be the one making the payments. This means that you cannot take the interest deduction if your parents are paying back the loan.
Can a Parent Deduct Student Loan Interest If the Child Isn’t a Dependent Any Longer?
Parents who are personally liable for repaying student loans can claim the interest deduction. This is true even if you aren’t claiming your child as a dependent on your taxes. You will want to look into the fine print, though, and make sure that you are the person that is legally liable for the debt repayment.
Are You Looking for More Tax Resources and Tips?
As you can see, the answer to the question “is my student loan tax deductible”? isn’t as straightforward as you might assume. The interest that you pay on your student loan in a given year is deductible, but only if you meet certain qualifications. On top of that, there is a limit on how much you can receive as a deduction.
On top of that, there are additional tax credits you might be eligible for. Every little bit helps, and it pays to be knowledgeable about how to legally lower your tax bill.
Are you looking for more useful information about paying taxes? Don’t forget to check out our library of tax resources here.