- If you’re making student loan payments, you can claim a deduction on your taxes for the student loan interest you paid.
- If you meet certain qualifications, you could claim a deduction from income of up to $2,500 each year.
- Even if you don’t itemize and take the standard deduction on your tax return, you can still claim the student loan interest deduction.
Student loan debt is a plight countless Americans are familiar with. Gone are the days when people would graduate from college with just $2,000 or $3,000 in debt to pay back. Now, students (and their parents) have significant debt that can take years, if not decades, to repay. In fact, 69% of college students who graduated in 2018 took out loans, according to Student Loan Hero, and the average debt upon graduation was $29,800 per student.
There is, however, a silver lining when it comes to student loan debt: You can claim a tax deduction on your annual taxes if you made student loan payments during the tax year. Below, we’ll take a detailed look at the student loan interest deduction and what it means for you.
What Is the Student Loan Interest Deduction?
When the time comes to file your taxes, you may be eligible for a deduction if you paid interest on student loans during the previous year. Student loan interest, according to the Internal Revenue Service (IRS), includes both required and voluntary prepaid interest payments.
You can claim whatever is less: $2,500 or the amount of interest you paid in the previous year. This will equal your student loan interest deduction. Keep in mind that this deduction is per tax return, not per taxpayer. This means that if you’re married and file jointly, you can only claim one deduction for the two of you.
There were rumors floating around that the student loan interest deduction would be eliminated, along with other tax deductions, by the 2017 Tax Cuts and Jobs Act (TCJA), but luckily, the tax perk was saved — for now.
Who Qualifies for It?
There are a handful of criteria established by the IRS that you must meet in order to claim this tax deduction. You must:
- Have paid interest on a qualified student loan in the previous tax year
- Be legally obligated to pay interest on that loan
- Not be filling as “married filing separately”
- Have a modified adjusted gross income, or MAGI, that is less than the IRS’s predetermined threshold, which changes each year.
Plus, if you’re filing jointly with your spouse, you can’t be claimed as a dependent on another person’s tax return. However, if you’re filing independently, you can still claim this deduction even if someone else claims you as a dependent.
Below, we’ll break down some of these qualifications.
What Is a MAGI and Why Does It Matter?
Your MAGI — which is typically the same as your adjusted gross income, or AGI — must be below a certain level. Otherwise, you’ll either be “phased out” or “eliminated” from this tax perk. If you’re phased out, the deduction amount will be gradually reduced until it tops out. If you’re income is above the threshold, the benefit is eliminated and you won’t be able to claim the deduction at all.
This year (2019 for the 2018 tax year) the phase-out salary threshold starts at $65,000 for single filers and $135,000 for joint filers. At MAGI of $80,000 for single filers and $165,000 for joint filers, the student loan interest deduction is eliminated.
For tax year 2019 (filing in 2020), the threshold for phasing out will start at MAGI above $70,000 for single filers and $140,000 for joint filers. The threshold for being eliminated will be a MAGI above $85,000 for single filers and $170,000 for joint filers.
What Types of Student Loans Qualify for This Deduction?
In order to qualify for this tax deduction, you must be paying back a student loan that is considered a “qualified student loan.” But what exactly does that mean?
A qualified student loan, according to the IRS, is a loan you took out to pay for higher education expenses that were for you or your spouse (or anyone you claimed as a dependent when the loan was taken out).
The loan must have been used for educational purposes, and you must have been an eligible student, which means you were enrolled in school at least half-time. In addition, you need to have incurred the education expenses within “a reasonable period of time before or after you took out the loan.”
How Do You Know How Much Interest You Paid in the Previous Year?
Perhaps you’re reading this eager at the thought of being able to claim a deduction on your taxes. But you have no clue how much student loan interest you paid in the previous year.
The best way to figure out how much interest you paid in the previous tax year is through the Form 1098-E, or Student Loan Interest Statement, which will be mailed to you by your lender during tax season. You will get this form regardless of whether you have “official” federal student loans or private student loans.
Is This an Itemized Deduction?
Nope! This deduction is claimed as a reduction to your income, which means you don’t need to itemize your deductions. Even if you’re taking the standard deduction on your tax return, you can still claim the student loan interest deduction if you qualify.
Your gross income is reduced by up to $2,500 with this tax deduction, which saves you from paying income taxes on that amount. If you’re single and your income reaches the 22% marginal tax bracket, this means a savings of $550. Think of it as a gift from Uncle Sam!
Student loan interest deduction is a good argument for first paying down credit cards and other consumer debt because this tax benefit lowers your effective interest rate on a portion of your student loans. Even better, you could apply the tax savings you gain to accelerate other debt repayment or add to your emergency fund. If you’ve already done both, direct any additional savings toward other financial goals like saving for retirement.
Figure Out If You Qualify
If you’re still unsure whether or not you can claim a deduction for student loan interest, consider taking this short questionnaire from the IRS, which can help you determine if you qualify. All you need to provide is your filing status (i.e. single or joint), basic information about your taxable income, your adjusted gross income, and your qualified educational expenses.
Interested in learning more about student loans? Check out this article on finding the best private student loans, as well as this one for the best strategies for repaying your subsidized or unsubsidized student loans.