Paying interest is no fun. But if you have student loan debt, you don’t have much choice.
Wouldn’t it be great if the government gave you a break on that student loan interest you pay each year?
Well, here’s some good news. You might be able to deduct a portion of student loan interest from your taxable income, up to $2,500, thanks to the student loan interest tax deduction. Find out if you qualify for this deduction and learn how to claim it below.
How The Student Loan Interest Tax Deduction Works
The IRS lets you claim the student loan interest tax deduction on Form 1040, Line 33. Because it’s considered an “above the line” deduction (i.e., an adjustment to your income), you don’t have to itemize your taxes in order to claim it.
Keep in mind, this is a deduction and not a credit. That means claiming this deduction will reduce your taxable income by up to $2,500. In terms of real dollars saved, your total tax bill could be reduced by up to $625, depending on your income and how much student loan interest you pay.
Who Qualifies For The Deduction?
There are three qualification criteria you need to meet in order to claim the student loan tax deduction:
- Have a Qualified Student Loan. First, you need to have a qualified student loan. The IRS says that the loan must be taken out to pay for qualified education expenses. Not only that, but it can’t be a loan from someone related to you, or provided as part of a qualified employer plan. So, if your grandma offers you a loan for your education, and you pay interest to her on top of making principal payments, you can’t deduct that interest. The same is true if your employer offers student loans as part of a company benefit. Only loans from the federal government or a private lender will qualify.
- Be a Qualified Student. Next, the loan must be taken out on behalf of a qualified student in order to deduct the interest. The student can be you, your spouse, or your dependent. So, you can still deduct student loan interest from your income, even if the loan is financing your spouse’s or child’s education and not yours. However, no matter who that student is, they must have been enrolled at least half-time in a program at an eligible educational institution when the loan was taken out. The program should lead to a degree, certificate, or other recognized credential.
- Meet Income Requirements. Finally, there is an income requirement. The IRS won’t let you claim the student loan interest deduction if your modified adjusted gross income (MAGI) is at least $160,000 if married filing jointly or $80,000 for other filing statuses.
To see if you qualify and find out how much you might personally save on your taxes, you can use a student loan interest deduction calculator to run the numbers. The IRS also offers a handy tool to determine if you qualify for the deduction. It takes about 10 minutes to complete.
How The Deduction Impacts Your Tax Bill
Realize that a tax deduction reduces your income. It doesn’t mean a dollar-for-dollar reduction in what you pay in taxes (that’s a credit). With a tax deduction, your tax bill is smaller because your taxable income is lower.
In the case of the student loan interest tax deduction, the maximum tax benefit is $625. Your actual tax benefit is determined by your income, filing status, and how much you paid in student loan interest.
Say you file single, your MAGI is $45,000, and you paid $800 in student loan interest. Your income might be reduced by $800, but the actual impact on your taxes is to lower what you pay by $200.
It’s still a reduction in what you owe, and when you combine the student loan interest tax deduction with other deductions and credits, it can make a big difference in your final tax bill (or refund).
How To Claim The Student Loan Interest Tax Deduction
Start by taking a look at how much you paid in interest (not your total student loan payments). That information can be found on Form 1098-E. Each of your student loan service provider should send you a copy. You can find the interest you paid in Box 1.