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How to Get a Student Loan Interest Deduction

How to Get a Student Loan Interest Deduction

The student loan interest deduction is a tax deduction for students and their parents who have incurred debt to pay for their education. It allows up to $2,500 of interest paid to be deducted from taxable income.

You may claim interest payments on the accumulated or compounded federal loan balance and interest payments on non-federal loans eligible for this exemption, such as private student loans.


Is student loan interest deductible?

Student loan interest is tax-deductible if adjusted gross income, or MAGI, is less than $70,000 ($140,000 if filing jointly). If your MAGI is between $70,000 and $85,000 ($170,000 if filing jointly), you can deduct less than the maximum of $2,500.

You cannot itemize the student loan interest deduction; it is taken above the line. This means deducting your taxable income to save money. For instance, if you fall into the 22% tax bracket, the highest student loan interest deduction would net you $550.


Who can deduct student loan interest?

If your Modified Adjusted Gross Income is less than $85,000 (and $170,000 for married filing jointly), you can subtract student loan interest paid on private and federal student loans if:

  • You had to repay the loan: Even if your wages are being garnished or you are legally accountable for the loan, you can still deduct the interest paid.

  • You took out a loan for a dependent: If you took out a loan in your name for someone else, such as a Parent PLUS loan for your child, you could deduct the interest on the student loan.

  • You took out the loan for your studies: This deduction doesn't just apply to college graduates doing taxes– if you're an entrepreneur paying off student loans while you're still in college, you may also qualify for this deduction.

  • You used the loan for eligible educational expenses: This includes tuition, room and board, books, and other necessary expenses, such as transportation.

You cannot claim a student loan deduction if your filing status is married filing separately. You are also not qualified if you are listed as a dependent on someone else's tax return.


Student loan interest deduction form

If you paid more than $600 (six hundred dollars) in interest in 2021, you would automatically receive Form 1098-E, a Student Loan Interest Deduction Form, by mail or email.

You may have paid less than this amount because interest rates on federal loans were frozen at 0%, and payments were suspended for a larger part of the year. But you can deduct everything you pay if you qualify.

If you do not receive a student loan interest deduction document, ask your private lender or student loan servicer to send the document to you. A copy of the form and details of the interest you have paid may also be available on your online account portal.


Are student loan payments tax deductible?

When you repay student loans, you pay off your original balance and the interest accrued on that balance. You can deduct it from your taxes, but the full amount of the student loan payment is not deductible.

For example, suppose you have a student loan of $29,000 with an interest rate of 5%. At the start of the standard 10-year payment plan, you would pay about $308 per month, and about $121 of that payment would go to student loan interest.

In the first year of payment, you will pay a total of $3,691: $2,293 in principal and $1,398 in interest. If you qualify for the student loan interest deduction, you can reduce your taxable income by the portion that earned the interest.

This includes newly accrued interest, such as $1,398, and any money you pay for compound interest or added to your balance when you make the payment.


Additional Education Tax Breaks

If you are still in school or paying for school, the government offers tax credits and additional education deductions. You can apply for American Opportunity Credit or Lifetime Learning Credit, or you can choose to deduct taxes and fees if you don't qualify for a credit.

You can apply for these benefits even if you have paid student loan fees. Your income, as well as other factors, can help you determine what will save you the most. The same goes for the student loan interest deduction; you must file your taxes together if you are married to qualify for these tax deductions.


Should You Refinance Student Loans?

Refinancing student loans can reduce the monthly payment and the amount of interest payable. Do not refinance federal student loans while payments and interest are paused.


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Tiffany Gaskin
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