Student loans can be a significant burden on your finances, but the U.S. tax code makes it possible to get some of that money back in the form of a student loan interest deduction.
In 2017, there was a proposal to repeal the student loan interest deduction as part of the Tax Cuts and Jobs Act. Fortunately, though, the final bill didn't get rid of this valuable tax benefit.
Whether you have federal or private student loans, you may be able to take advantage of the student loan interest tax deduction. As you prepare your tax return, make sure you know whether you qualify and how the deduction can help lower your tax bill.
The student loan interest deduction allows eligible student loan borrowers to deduct some or all of the amount they paid in interest on their student debt as an adjustment to their income.
The deduction is unique because it's the only personal interest other than mortgage interest that you can deduct on your tax return.
If you qualify, you can use the deduction to reduce your income by up to $2,500, depending on how much you paid and your modified adjusted gross income (MAGI).
You can claim the student loan tax deduction even if you don't itemize deductions, which isn't the case for things like mortgage interest, charitable contributions, and medical expenses. On the 1040 tax form, you would deduct your allowed amount from your gross income, so it helps reduce your adjusted gross income (AGI). The IRS uses your AGI to determine whether you qualify for other tax deductions and credits, so the lower it is, the better.
With an average tax rate of about 15%, the average tax savings with the maximum student loan interest deduction are $375. Depending on your situation, however, your savings could be more or less than that. Either way, it has the potential to save you hundreds of dollars if you owe taxes or increase your tax refund if you don't.
There's no time limit for how long you can claim the deduction, which can be good news if your loan repayment term has been extended to 20, 25, or even 30 years.
Like many other tax benefits, the value of the student loan interest deduction is gradually reduced if your MAGI is between $65,000 and $80,000 (or $135,000 to $165,000 if you're married filing jointly). If your MAGI exceeds those ranges, the IRS won't allow you to claim the deduction at all.
Other requirements include:
You must have taken out the loan for the sole purpose of paying qualified education expenses while enrolled at least half-time at an eligible educational institution.
You took out the loan for yourself, your spouse, or someone who was your dependent when you borrowed the money.
You didn't receive the loan from a family member or through a qualified employer plan, such as a 401(k).
You can't be claimed as a dependent by someone else on their tax return.
If you're a parent, you can claim the deduction if no one else claims your child as a dependent on their tax return, if you're legally obligated to pay the interest on a qualified student loan, and if you actually paid the interest on the loan.
If you meet the IRS requirements, then you can include some or all of the student loan interest you paid during the year.
To find out how much you paid in student loan interest for the year, you'll need your 1098-E form. The IRS requires student loan servicers to provide the form to borrowers who paid more than $600 in interest during the year. That said, you may still get one if you paid less than that.
If you're eligible to receive the form, you'll receive it either in the mail or through your online account by January 31 of each year.
Once you have it, you can use the student loan interest deduction worksheet to determine whether you qualify for the tax break and how much you can claim. Once you know this, you'll add your deduction amount to the 1040 Schedule 1 form, which is used to determine your AGI.
If this process sounds too complicated, you can opt to use tax filing software or a tax accountant to do the math for you.
The student loan interest deduction is a nice tax benefit, but paying less interest overall can be a lot better than getting a small portion of your interest back each year.
By refinancing your student loans and having a plan to pay them off as quickly as possible, you can reduce how much interest you pay each month and over the life of your loan.
That said, you may want to hold off on paying down your student loans faster if you have higher-interest debt, such as credit cards. There's no tax deduction for credit card interest — unless you incurred it for a business — and paying off the high-interest debt first will save you more in the long run.
It also may be worth it to hold onto your student loans if you're working toward qualifying for a loan forgiveness program.
If your MAGI is high enough that you're past the student loan interest deduction phase-out threshold, you won't be able to take advantage of this tax break.
But if you do qualify, the student loan interest deduction can be a great way to trim a few hundred dollars off your tax liability each year.
Once you have your 1098-E form in hand, use the student loan interest deduction form to figure out how much you can claim. Then continue filling out the rest of your tax return like you normally would.
Again, depending on how complicated the process seems to you, it may be better to use an online tax preparation service or hire a tax professional.