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Annual Tax Season Reminder: You May Qualify for a Student Loan Interest Refund in 2021

Kathryn Morstad

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The student loan interest deduction was reintroduced under the Taxpayer Relief Act of 1997 after being repealed in 1986.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.

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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.

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Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 11-21-2022. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

SoFi Rate Disclosure

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Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 2.24% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

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Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.24% APR to 9.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 3.49% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

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Fixed Rate Loan Terms: 5 years/60 monthly payments, 7 years/84 monthly payments, 10 years/120 monthly payments, 15 years/180 monthly payments, or 20 years/240 monthly payments. Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. This rate is expressed as an APR. Fixed APRs range from 3.94% to 8.48% APR [low to high range with 0.25% auto-debit rate reduction]. Rates are subject to change without notice. Fixed rates will not change during the term. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan including a 0.25% auto-debit rate reduction. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. All estimates are based on information provided by you and are for informational purposes only, accuracy is not guaranteed and may not reflect actual rates or savings and do not constitute an offer of credit. Your actual rate, payment and savings may be different based on credit history, actual interest rate, loan amount, and term, including your cosigner [if applicable]. If applying with a cosigner, we use the higher credit score between the borrower and the cosigner for approval purposes. All loans are subject to credit approval.

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