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.
Note that interest on student loans from federal agencies has been indefinitely suspended during the coronavirus crisis by President Trump, as of March 13, 2020. 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.
- The student loan interest deduction lets you deduct up to $2,500 of the interest you paid on a loan for higher education.
- To be eligible, your income must be under certain limits.
- You don't have to itemize deductions when you file your income taxes in order to claim this deduction.
- Interest on student loans from federal agencies has been indefinitely suspended during the coronavirus crisis by President Trump, as of March 13, 2020, so those with federal loans may not have interest to deduct while this suspension is in effect.
How a Student Loan Interest Deduction Works
Like other types of deductions, the student loan interest deduction reduces your taxable income. So, for example, if you are in the 22% tax bracket and claim a $2,500 deduction, your deduction would reduce the taxes you owe—or increase the tax refund you receive—by $550.
Unlike most other types of deductions, the student loan interest deduction is claimed as an adjustment to income on Internal Revenue Service (IRS) Form 1040. You don't have to itemize deductions on Schedule A in order to claim it.
To qualify for a deduction, the student loan must have been taken out for either the taxpayer, their spouse, or their 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. Additionally, 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 on its website.
The student loan interest deduction isn't the only tax break available to students and parents. There are also federal tax credits for higher education.
As mentioned, 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 whatever amount you did pay. If you paid more than $600 in interest for the year, you should receive a Form 1098-E from the lending institution.
The student loan interest deduction can also be reduced or eliminated entirely, depending on the taxpayer's income. Taxpayers who file as single are entitled to a full deduction if their modified adjusted gross income (MAGI) is $65,000 or less, and a partial deduction if their MAGI is over $65,000 but less than $80,000. Anyone with a MAGI over $80,000 can't claim a deduction.
For married taxpayers filing jointly, the limits are $135,000 for a full deduction and between $135,000 and $165,000 for a partial one. Couples who report over $165,000 are ineligible.
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 Higher-Ed Students
In addition to the student loan interest deduction, students 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 enjoy tax benefits by participating in a 529 Plan. This plan allows a number of different advantages such as using tax-free funds to pay for higher education expenses including tuition, fees, and other school-related costs. 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 to 12 education at private, public, and religious schools. The rules were expanded even further when the Setting Every Community Up for Retirement Enhancement Act (SECURE) 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.