Student Loan Interest Deduction Definition and How to Claim It

What Is the Student Loan Interest Deduction?

The student loan interest deduction is a federal income tax deduction that allows borrowers to subtract up to $2,500 of the interest paid on qualified student loans from their taxable income. It is one of several tax breaks available to students and their parents to help pay for higher education. Individuals must meet certain eligibility criteria, including filing status, and are subject to a student loan interest deduction phase out based on income level, to qualify for the deduction.

The student loan interest deduction phase out for 2022 starts at a modified adjusted gross income (MAGI) of $70,000 and ends at $85,000 if you are single, head of household, or a qualifying widower. If you are married and filing jointly, the phase out begins at a MAGI of $145,000 and ends at $175,000. For 2023, the MAGI phase out for single, head of household, or qualifying widower begins at $75,000 and ends at $90,000. If you are married and filing jointly, the MAGI phase out begins at $155,000 and end at $185,000.

Key Takeaways

  • The student loan interest deduction allows borrowers to deduct up to $2,500 of the interest paid on a loan for higher education directly on Form 1040.
  • Eligibility for the deduction includes an individual's filing status and income level.
  • The deduction is capped at the amount paid for those who paid less than $2,500.
  • Anyone who pays more than $600 in interest for the year should receive a Form 1098-E from the lending institution.
  • Federal student loan borrowers may not have deductions to claim as payments for interest on these student loans were suspended by the Biden administration.

How the Student Loan Interest Deduction Works

The Internal Revenue Service (IRS) outlines a variety of tax deductions that allow individuals to reduce their taxable income for the year. One of these is the student loan interest deduction, which allows for the deduction of up to $2,500 of the interest paid on a student loan during the tax year. So individuals who fall in the 22% tax bracket should be able to take the full $2,500 deduction or the amount they actually paid in student loan interest, whichever is lesser.

Taxpayers who wish to use the deduction must meet certain qualifications. For instance:

  • The student loan must have been taken out for the taxpayer, the taxpayer's spouse, or dependent(s). Parents who help legal borrowers with repayment cannot claim the deduction.
  • The loan must 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.
  • The loan must be used for qualified higher-education expenses (tuition, fees, textbooks, supplies, and equipment) and cannot include room and board, student health fees, insurance, and transportation.
  • The loan must be used within a “reasonable period” after it is taken out, and the proceeds must be disbursed either within 90 days before the academic period starts or 90 days after it ends.
  • The school where the student is enrolled must be an eligible institution, including all accredited public, nonprofit, and privately owned for-profit post-secondary institutions that participate in the student aid programs managed by the U.S. Department of Education.

Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. This means you don't have to fill out a Schedule A, which is used to itemize deductions, to claim it.

Special Considerations

As noted, you can 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 the form directly from the IRS website.

Income Limits for Eligibility

The student loan interest deduction is reduced or eliminated for higher-income taxpayers. For the 2022 tax year, the amount of your student loan interest deduction is gradually reduced or phased out if your modified adjusted gross income (MAGI) is between $70,000 and $85,000 for single taxpayers. It's between $145,000 and $175,000 in 2022 for those who file married and jointly. You can’t claim the deduction if your MAGI is above the maximum amount. For 2023, the phase out for single taxpayers begins at $75,000 and ends at $90,000. If you are married and filing jointly, the phase out for the 2023 tax year begins at $155,000 and end at $185,000. You can’t claim the deduction if your MAGI is above the maximum amount.

Income limits for student loan interest deductions are adjusted annually for inflation.

Student Loan Interest Deduction vs. Other Breaks

Students enrolled in higher education programs and their parents may be eligible for other breaks, including tax credits, in addition to the student loan interest deduction. Tax credits are even more valuable than deductions because they are subtracted from the tax you owe on a dollar-for-dollar basis rather than simply reducing your taxable income.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) allows taxpayers to receive a credit for qualified expenses paid for the higher education of an eligible student during their first four years at a post-secondary institution. The total credit is capped at $2,500 per student per year. Taxpayers receive 100% of the credit for the first $2,000 spent on expenses and 25% for the next $2,000 spent on that student.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) provides students with a maximum tax credit of $2,000 per tax return for qualified tuition and school-related expenses who are enrolled in an eligible post-secondary institution. This includes any qualified expenses used to pay for courses toward an undergraduate, graduate, or professional degree. There is no cap on the number of years that taxpayers can claim the credit.

There are three criteria that taxpayers must meet to claim the credit:

  1. The taxpayer, their dependent, or another party pays for qualified higher education expenses.
  2. The taxpayer, their dependent, or another party pays the expenses for an eligible student enrolled at a qualified institution.
  3. The taxpayer is the student, their spouse, or a dependent listed on their tax return.

The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for single taxpayers with MAGIs over $80,000, and over $160,000 for joint filers.

College Savings Plans

You can also get 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 K-12 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.

Student Loan Payment Suspensions

On March 13, 2020, then-President Trump suspended federal student loan payments, interest-free, indefinitely during the coronavirus crisis. President Joe Biden continued the pause until Sept 30, 2021, then until Dec. 31, 2022.

Currently, the pause on student loan payments has been extended once again. While the White House's student loan forgiveness is blocked by a federal court, the new pause is in effect until the earlier of either:

  1. 60 days after the Department of Education is allowed to implement the loan forgiveness program or current litigation about the program is resolved; or
  2. 60 days after June 30, 2023.

Keep in mind, though, that this does not affect private student loans. The pause on federal student loan payments does mean that you may not have interest payments to deduct for any federal student loans while this suspension is in effect.

As part of the American Rescue Plan, signed into law on March 11, 2021, by President Biden, all forms of student loan forgiveness from Jan. 1, 2021, until the end of 2025, are now tax-free.

Example of a Student Loan Interest Deduction

Here's a hypothetical example to show how student loan interest deductions work. Let's suppose you're a single taxpayer with a MAGI 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   ×   $ 72.000     $ 65 , 000 $ 80 , 000     $ 65 , 000   =   $ 900   ×   $ 7 , 000 $ 15 , 000   =   $ 420 \$900\ \times\ \frac{\$72.000\ -\ \$65,000}{\$80,000\ -\ \$65,000}\ =\ \$900\ \times\ \frac{\$7,000}{\$15,000}\ =\ \$420 $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.

Article Sources
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