Student Loan Interest Deduction: What You Should Know

You can get a student loan tax deduction or tax credit for education expenses. These expenses include any interest you’re paying on student loans. In this article, we will give you a breakdown of what student loan interest deduction is about.

For all the bad that comes with student loans, there’s one silver lining: They may help you save on your taxes.

Thanks to the student loan interest deduction, you may have a few extra dollars in your pocket come tax season if your income is under a certain amount and your student loans qualify.

In this article we’ll be focusing on:

What is the Student Loan Interest Deduction?

The student loan interest deduction is a federal income tax deduction that allows you to subtract up to $2,500 in the interest you paid on qualified student loans from your taxable income.

It is one of several tax breaks available to students and their parents to help pay for higher education.

How Student Loan Interest Works

When you need money for college, you might take out a student loan. Lenders won’t give you the money for free — they expect to be paid interest.

You’ll pay this interest as you repay your student loan. In fact, when you make a payment toward your loan, it goes toward the interest first, before any of it reduces your principal — or the original amount you borrowed. Over the course of a year, that interest adds up.

To qualify for this deduction:

Your loan has to go toward qualified educational expenses (tuition, books, room, and board).
You can’t be claimed as a dependent on someone else’s return (your parents’ return, for instance).
Both federal and private loans count.
If you’re in school, you should be enrolled in a degree program at least half-time.
If you’re a graduate, you should have paid interest on a qualifying loan in the year for which you’re filing.
Your MAGI—Modified Adjusted Gross Income—should be $80,000 or less for a single return, $160,000 or less for a married return filed jointly. (We’ll cover married tax returns later.)

Specifically, you can claim:

Simple or capitalized interest. Capitalized interest is any unpaid interest on a student loan that’s added to the balance. (Note: You can’t claim this interest if you made no payments that year.)
Interest on a refinanced or consolidated loan.
Voluntary interest payments—payments you make in times when they’re not required, like during a deferment.
Any loan origination fees.

How the Tax Deduction Works

Now comes the student loan interest deduction. To calculate your interest deduction, you take the total amount you paid in student loan interest for the tax year — from January 1 to December 31, for most people — and deduct it from your taxable income.

The deduction is capped at $2,500, and it may be reduced the higher your income is. Federal and private loans both qualify for the deduction.

Though it’s a drag you can’t deduct all of your student loan interest, the deduction can be a big help. Ultimately, it lets you pay less in taxes or receive a larger tax refund.

Other Tax Breaks that You Can Get For Your Student Loans

There are a few more ways student loans can help you you can save on your taxes:

American Opportunity Tax Credit

The American opportunity tax credit (AOTC) allows you or your parents to deduct up to $2,500 each year for the first four years of your higher education.

To earn the tax credit, the student must attend a degree-granting at least half-time and must either be you, your spouse, or a dependent listed on your taxes. You also must have a MAGI of $90,000 or less to qualify — $180,000 for joint filers.

Lifetime Learning Credit

The lifetime learning credit (LLC) allows you to deduct up to $2,000 a year while you’re enrolled in a higher education program — including undergraduate, graduate, and even professional development courses.

There’s no limit to how often you can use this, though your MAGI must not be more than $68,000 or more — $136,000 for joint filers.

No Taxes On Some Types Of Forgiveness

Before the 2018 tax reform, federal student loan borrowers who qualified for forgiveness or discharge had to pay income taxes on the amount the government canceled.

That’s still the case in most situations. But now you don’t have to pay income tax if you qualify for death or permanent disability discharge.

FAQs

1. Do I qualify for a deduction if I defaulted on my federal student loans?

Probably not. In fact, the government might garnish all or part of your tax refund if you default on your federal student loans. Learn more about when this might happen and how to prevent it with our guide to student loan tax garnishment.

2. Are my parents eligible for a deduction if they’re paying off my loans?

Yes, if they’re paying off a parent loan in their name or claim you as a dependent on their tax return. Otherwise, only you can get that deduction.

3. Can I deduct all my student loan payments from my taxes?

No, you can only deduct the student loan interest you paid from your taxes.

4. If my parents cosigned my student loan, can they claim the student loan deduction?

Yes. Because they are legal owners of the loan, they can claim the deduction if they paid interest on the money borrowed and you’re still considered their dependent.

5. I’m repaying my loan through a repayment assistance program. Am I eligible for a deduction?

No. Anyone paying off a student loan with a repayment assistance program like the National Health Service Corps (NHSC) Loan Repayment Program isn’t eligible for a tax deduction.

Saving a few hundred dollars on your taxes or getting a bigger refund can make a difference in your personal finances.

Be sure to check with a tax professional if you have any questions about the student loan interest deduction or any other concerns when filing.

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Student Loan Interest Deduction: What You Should Know