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The student loan interest deduction allows you to subtract up to $2,500 from your taxable income for interest paid on student loans. (iStock)
If you have student loans, paying for college doesn’t end when you leave school. And repaying student loans can cost thousands of dollars in interest every year, depending on the loan balance, your interest rate, and repayment term.
The student loan interest deduction is one tax break that mitigates the costs of a higher education by lowering your federal taxable income by up to $2,500. Since it’s an above-the-line deduction, you can claim it even if you don’t itemize your deductions when you file your taxes.
This deduction may be available if you’re paying interest on a qualified student loan and meet certain requirements. Here’s what to know about how the student loan interest deduction works, who qualifies for it, and how to claim it.
Refinancing can also help decrease student loan interest costs, so it may make sense to compare rates from multiple lenders using a marketplace like Credible.
- How does the student loan interest deduction work?
- Who can take the student loan interest deduction?
- How much can I deduct for student loan interest?
- How do I take the student loan interest deduction?
- Other ways to reduce your student loan interest costs
A tax deduction allows you to subtract a certain amount from your taxable income before you calculate your tax liability. For example, say your taxable income is $50,000 and you qualify for the maximum student loan interest deduction of $2,500. It’ll reduce your taxable income to $47,500, which can lower your federal tax liability.
You may be able to claim the student loan interest deduction if:
- You made required or prepaid interest payments on a qualifying student loan.
- The loan was for yourself, a spouse, or a dependent.
- The student attended an eligible college. A qualifying loan can be a federal or private student loan. Funds you receive from a relative or qualified employer plan don’t qualify.
- Accredited public and private universities, colleges, vocational schools, and other post-secondary learning institutions are considered eligible schools if they qualify to participate in a student aid program administered by the U.S. Department of Education.
Only borrowers who meet all eligibility requirements can take the student loan interest deduction. If you’re married, your filing status must be married filing jointly — you can’t take this deduction if you and your spouse file separately. And your marginal adjusted gross income (MAGI) — income before subtracting any student loan interest — has to be below a certain amount.
In addition, you must meet these requirements:
- You made interest payments on a qualifying student loan.
- You’re legally obligated to pay interest on the loan.
- If filing jointly, neither you nor your spouse can be claimed as a dependent on someone else’s tax return.
- You must be enrolled at an eligible school at least half-time in a program leading to a degree, certificate, or other recognized credential.
For the 2020 tax year, the modified adjusted gross income limits to qualify were:
- $85,000 if your filing status was single, head of household, or qualifying widow
- $170,000 if your filing status was married filing jointly
Keep in mind that these limits could change for 2021 taxes, which will be due in April 2022. If you need assistance, the IRS has an Interactive Tax Assistance tool on its website to help determine whether you qualify for the student loan interest deduction.
If you’re considering refinancing as a way to lower student loan interest costs, Credible makes it easy to compare rates from multiple lenders.
The maximum student loan interest deduction is $2,500. If you qualify, the amount you can deduct will depend on these factors:
- Your MAGI
- The amount of interest you paid on your student loans
- How much of the interest you’re allowed to deduct
Your MAGI impacts how much you can deduct — once it reaches a certain amount, the $2,500 deduction begins to phase out. For instance, if your MAGI is below the phase-out threshold and the amount of qualifying interest you paid was $600, then you can deduct $600.
But if your MAGI falls within the phase-out range, the amount of interest you can deduct will be lower.
Here are the phase-out ranges for the 2020 tax year:
- $70,000 and $85,000 if your filing status is single, head of household, or qualifying widow
- $140,000 and $170,000 if your filing status is married filing jointly
Again, these thresholds could be different for the 2021 tax year.
Student loan forbearance and the tax deduction
If you have a student loan in federal forbearance, interest has been waived and payments have been suspended until Jan. 31, 2022. This means that if you continued making payments this year, it went directly toward your principal balance. Because you didn’t pay any interest on this loan, you can’t claim the student loan interest deduction for this loan.
But once interest starts accruing again on Feb. 1, 2022, and you resume payments on the loan, you may be able to claim the student loan deduction when you file your taxes for 2022.
If you qualify, here’s what you should do to claim the student loan interest deduction.
- Figure out how much interest you paid. To determine how much interest you paid, look for your Form 1098-E. The amount you paid in interest is listed on the form. If you paid more than $600 in interest, your loan servicer is required to send it to you electronically or by mail. Keep in mind that you can also view your account statement or request the information from your lender if it isn’t required to send you the form.
- Claim it on your tax return. To claim the student loan interest deduction, complete Form 8917 and submit it with your Form 1040 or 1040-SR. Enter the allowable amount on line 20 of the 1040 form.
While taking the student loan interest deduction could help you save a few hundred dollars, taking the following actions can help you save even more on interest.
- Refinance your student loans. Refinancing a student loan involves taking out a new loan with a private lender to pay off some or all of your existing federal and private student loans. The new loan typically comes with different repayment terms and a lower interest rate. If you receive a lower rate, it could help you save a lot on interest. It’s important to note that refinancing your federal student loans into a private student loan will cause you to lose access to certain federal benefits, including student loan forgiveness, forbearance, and income-driven repayment (IDR) plans.
- Consolidate federal student loans. A Direct Consolidation Loan allows you to merge multiple federal student loans into one with a single monthly payment. Although it doesn’t necessarily lower your interest rate, choosing a shorter repayment term could help you pay less interest.
- Make extra loan payments. Another way to lower your interest costs is to make extra payments on your loan. To do this, consider reviewing your expenses and cutting any unnecessary ones, such as cable or a gym membership. Afterward, reallocate those funds toward paying down your student loan.
- Avoid income-driven repayment plans. If you have a federal student loan, you may qualify for an income-driven repayment plan. IDR plans allow you to make payments based on your income and family size. Although this plan could lower your monthly payments, it could increase the amount of interest you pay in the long run.
- Avoid extending repayment terms. Similar to enrolling in an IDR plan, taking this action could lower your monthly payment. But the downside is that extending your loan repayment term can increase the amount of interest you pay over the life of the loan.
If you choose to refinance your student loans, Credible makes it easy to compare rates from multiple lenders.