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 of 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.
- The student loan interest deduction allows you to deduct up to $2,500 of the interest you paid on a loan for higher education.
- You don't have to fill out a Schedule A. The deduction can be claimed on your 1040A.
- Interest on student loans from federal agencies was indefinitely suspended during the coronavirus crisis as of March 13, 2020, then extended to Sept. 30, 2021, by executive order on President Biden's first day in office, so taxpayers with federal loans may not have interest to deduct while the suspension is in effect.
How the Student Loan Interest Deduction Works
Like any tax deduction, the student loan interest deduction reduces your taxable income for the year. So, for example, if you are in the 22% tax bracket and claim a $2,500 deduction, the deduction would reduce your federal income tax for the year by $550.
On March 13, 2020, President Trump suspended federal student loan payments, interest-free, indefinitely during the coronavirus crisis. Then, on his first day in office, January 20, 2021, President Joseph R. Biden Jr. continued the "pause" on student loan payments until September 30, 2021. This does not affect private student loans, but it will mean that you may not have interest payments to deduct while this suspension is in effect.
Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Internal Revenue Service (IRS) Form 1040. That means you don't have to also fill out a Schedule A, which is used to itemize deductions, in order to claim it.
Qualifications for the Deduction
To qualify for a deduction, the student loan must have been taken out for the taxpayer, the taxpayer's spouse, or dependent(s). If the student is the legally obligated borrower, a parent who helps with repayment cannot claim the deduction.
The loan must also be taken out during an academic period for which the student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential.
It has to be used for qualified higher education expenses, such as tuition, fees, textbooks, supplies, and equipment needed for coursework. Room and board, student health fees, insurance, and transportation do not count as qualified educational expenses for a student loan interest deduction.
The loan must be used within a “reasonable period of time” after it is taken out. Loan proceeds must be disbursed within 90 days before the academic period starts or 90 days after it ends.
The school where the student is enrolled must also be an eligible institution. Under IRS rules, that includes all accredited public, non-profit, and privately owned for-profit post-secondary institutions that participate in the student aid programs managed by the U.S. Department of Education. The department publishes a list of eligible institutions.
As part of the American Rescue Plan, signed into law on March 11, 2021 by President Biden, all forms of student loan forgiveness from January 1, 2021, until the end of 2025, are now tax-free.
As noted, you can currently deduct up to $2,500 of the interest you paid on an eligible student loan. If you paid less than that, your deduction is capped at the amount you paid.
If you paid more than $600 in interest for the year, you should receive a Form 1098-E from the lending institution. If you don't receive it, you can download it directly from the IRS site.
Income Limits for Eligibility
The student loan interest deduction is reduced or eliminated entirely for higher-income taxpayers. For tax year 2020, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint return).
These figures are adjusted annually for inflation.
Example of a Student Loan Interest Deduction
As an example, let's suppose you're a single taxpayer with a modified adjusted gross income of $72,000 who paid $900 in interest on a student loan. Because you earned too much to qualify for a full deduction, you have to calculate your partial deduction. The first part of the calculation would be:
$900 × $80,000 − $65,000$72.000 − $65,000 = $900 × $15,000$7,000 = $420
The $420 represents how much of your $900 in interest is disallowed. So as a final step, you'd subtract $420 from $900 to arrive at an allowable deduction of $480.
IRS Publication 970, "Tax Benefits for Education," includes a worksheet you can use to calculate your modified adjusted gross income and student loan interest deduction.
Other Tax Breaks for Students
In addition to the student loan interest deduction, students enrolled in higher education programs and their parents may be eligible for other tax breaks. Those include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. A tax credit is even more valuable than a deduction because it is subtracted dollar for dollar from the tax you owe rather than simply reducing your taxable income.
You can also get some tax benefits by participating in a 529 Plan. This type of savings plan offers tax advantages to parents as they save for the education of their children. The Tax Cuts and Jobs Act (TCJA) of 2017 expanded the rules to include payment of up to $10,000 in annual tuition costs of kindergarten through 12th-grade programs at private, public, and religious schools.
The rules were expanded even further when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. This act allows account holders to use their plans to pay for costs associated with a beneficiary's approved apprenticeship program and to withdraw a lifetime maximum of $10,000 to apply to qualified student debt.