People who are getting ready to file their 2020 taxes may be eligible for additional refund money if they paid student loan interest during the past year. But like so many things affecting 2020, student loan payments were treated differently than previous years and this will affect your 2020 tax returns as well.
With the unusual circumstances of the last year, just how much interest you paid may be less than during a normal year. With all federal student loan payments deferred starting on March 13, 2020, the interest amounts eligible will be from payments made on federal student loans made prior to the deferral date or on payments made on private student loans.
When are 2020 tax returns due?
Last year, the 2019 tax return due date was postponed until July 15, 2020, to give ample time to people affected by the coronavirus pandemic. However, this year the deadline has gone back to Thursday, April 15, 2021. So personal tax returns have to be postmarked no later than midnight on that day or be subject to penalties and interest charges.
What is the student loan interest deduction?
The student loan interest deduction was reintroduced under the Taxpayer Relief Act of 1997 after being repealed in 1986. Starting with a maximum amount of $1,000 in 1998, it has since grown to the current amount of $2,500 and is treated as an adjustment to income before any deductions (like the standard or itemized deductions).
Who’s eligible for the student loan interest deduction?
To be eligible to use the deduction, you must be legally obligated to pay the loan(s). That means the loan must be in your name whether you are the student or the parent for either federal or private loans. Also, the loan must be used for qualified education expenses – tuition, room and board, books and supplies, and school fees.
You also must file according to limits set by the IRS tax code (adjusted annually for inflation), which for 2020 include:
- Single, head of household, or qualifying widow(er)
- Full deduction if your modified adjusted gross income (MAGI) is less than $70,000
- Partial deduction if your MAGI is between $70,000 and $85,000
- No deduction if your MAGI is over $85,000
- Married taxpayers filing jointly
- Full deduction if your combined MAGI is less than $140,000
- Partial deduction if your MAGI is between $140,000 and $170,000
- No deduction if your MAGI is over $170,000
Unfortunately, you are ineligible if you are claimed as a dependent on someone else’s tax return. Also, there is no carryover from year to year on student loan interest deductions.
How does the student loan interest deduction work in 2021?
Known as an “above the line” adjustment to income, your student loan interest deduction adjusts or deducts the amount paid up to the maximum from your MAGI.
This allows you to use the Standard Deduction which, for the 2020 Tax Year, is $12,400 for Single, $18,650 for Head of Household, and $24,800 for Married Couple Filing Jointly and a Qualifying Widow(er) and is on line 12 of 2020 Tax Form 1040. This adjustment can also be used when itemizing your deductions on Schedule A as well.
Subtracted from line 20 of Schedule 1, 2020 Tax Form 1040, this student loan interest deduction will reduce your MAGI impacting the amount you pay for federal and state taxes, as well as positively affecting other possible deductions and credits that are based on your MAGI.
How to make sure you’re getting the biggest student loan refund possible next year
For 2021, the Biden Administration has extended the loan payment deferral until the end of September. So, again, next year, the only interest paid will be on federal loans during the last quarter of 2021 and on private loans. That could mean another year where you aren’t getting the full benefit of the tax deduction, but interest was deferred so it evens out.
If you have private loans, you may want to consider refinancing those loans now to score a lower interest rate and save money over the life of the loans.
Depending on the amount of student loan debt you have, you can lower your interest rate and still take advantage of the student loan deduction for 2021 and years beyond.
How would refinancing help?
Interest rates have never been lower.
If you are like most people, you accumulated loan debt over the course of your education and now have several different loans at interest rates as high as 6% or 7%.
By refinancing, you could consolidate all of your loans at a lower interest rate. With good credit and a stable, solid income, many private lenders are loaning money with rates as low as 2% and 3%. That means savings each month on your loan payments and your interest is still deductible on next year’s tax return up to the maximum amount of $2,500.
What interest rate can you qualify for?
We have developed a best-in-class rate comparison tool to help you analyze your debt and refinancing opportunities. By using our tool, our industry-leading team of private lenders each give you a specific pre-approval offer that you can compare side-by-side to find your optimal package.
All that’s required is for you to fill out some basic information — it’s free and, if you choose to refinance with one of our lending partners, there are no fees to apply and no pre-payment penalties on any of the loans.
To sum up
The student loan tax deduction can save you money on your 2020 taxes by deducting up to the maximum of $2,500 “above the line” as an adjustment to income. That could work out to a savings of $550 depending on your tax rate.
For 2021, consider refinancing your private loans to lower interest now while still being able to use interest you do pay when you prepare your taxes in 2022.
Check out what our best lenders have to offer at Purefy.