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The student loan interest deduction allows you to subtract up to $ 2,500 from your taxable income for interest paid on student loans. (iStock)
If you have student loans, paying for college doesn’t stop when you leave school. And paying off student loans can cost thousands of dollars in interest each year, depending on your loan balance, your interest rate, and the length of time you pay back.
The interest deduction on student loans is a tax break that mitigates the costs of higher education by reducing your federal taxable income by up to $ 2,500. Since this is an above-the-line deduction, you can claim it even if you don’t itemize your deductions when you file your taxes.
This deduction may be available if you pay interest on a qualifying student loan and meet certain conditions. Here’s what you need to know about how the student loan interest deduction works, who is eligible, and how to claim it.
Refinancing can also help reduce interest charges on student loans, so it may be a good idea to compare the rates of several lenders using a market like Credible.
How does the student loan interest deduction work?
You may be eligible for the student loan interest deduction if:
- You have made required or prepaid interest payments on a student loan.
- The loan was for yourself, a spouse or a dependent.
- The student attended an eligible college. An eligible loan can be a federal or private student loan. Funds you receive from a parent or a qualified employer plan are not eligible.
- Universities, colleges, vocational schools, and other accredited public and private post-secondary educational institutions are considered eligible schools if they qualify to participate in a student aid program administered by the US Department of Education. .
Who Can Benefit from the Student Loan Interest Deduction?
Only borrowers who meet all of the eligibility requirements can benefit from the interest deduction on student loans. If you are married, your filing status must be that of a joint filing – you cannot take this deduction if you and your spouse file separately. And your Adjusted Marginal Gross Income (MAGI) – income before student loan interest is subtracted – must be less than a certain amount.
In addition, you must meet these requirements:
- You paid interest on a qualifying student loan.
- You are legally required to pay interest on the loan.
- If you are filing jointly, neither you nor your spouse can be claimed as a dependent on someone else’s income tax return.
- You must be enrolled in an eligible school at least part-time in a recognized diploma, certificate or other diploma program.
For the 2020 tax year, the adjusted gross income limits amended to qualify were as follows:
- $ 85,000 if your filer status was single, head of family or eligible widow
- $ 170,000 if your filing status was married joint filing
Keep in mind that these limits could change for the 2021 taxes, which will be due in April 2022. If you need help, the IRS has a Interactive tax assistance tool on their website to help you determine if you qualify for the student loan interest deduction.
If you are considering refinancing as a way to reduce interest charges on student loans, Credible allows you to compare the rates of several lenders.
How much can I deduct for student loan interest?
The maximum interest deduction on student loans is $ 2,500. If you qualify, the amount you can deduct will depend on these factors:
- Your MAGI
- The amount of interest you paid on your student loans
- How much interest you are allowed to deduct
Your MAGI has an impact on how much you can deduct – once it reaches a certain amount, the $ 2,500 deduction starts to gradually disappear. For example, if your MAGI is below the phase-out threshold and the amount of qualifying interest you paid was $ 600, then you can deduct $ 600.
But if your MAGI is in the phase-out range, the amount of interest you can deduct will be less.
The phase-out ranges for the 2020 tax year are as follows:
- $ 70,000 and $ 85,000 if your declarant status is single, head of family or eligible widow
- $$ 140,000 and $ 170,000 if your filing status is married joint filing
Again, these thresholds could be different for the 2021 tax year.
Student loan abstention and tax deduction
But once the interest starts accruing again on February 1, 2022 and you resume payments on the loan, you may be able to claim the student loan deduction when you file your taxes for 2022.
How to benefit from the student loan interest deduction?
If you qualify, here’s what you need to do to claim the student loan interest deduction.
- Calculate the amount of interest you paid. To determine the amount of interest you paid, locate your Form 1098-E. The amount you paid in interest is shown on the form. If you have paid more than $ 600 in interest, your loan officer is required to send it to you electronically or by mail. Keep in mind that you can also view your account statement or request the information from your lender if they are not required to send you the form.
- Claim it on your tax return. To claim the student loan interest deduction, complete Form 8917 and submit it with your Form 1040 or 1040-SR. Enter the eligible amount on line 20 of Form 1040.
Other Ways to Lower Your Student Loan Interest Charges
While deducting interest on student loans can save you a few hundred dollars, the following steps can help you save even more on interest.
- Refinance your student loans. Refinance a student loan involves taking out a new loan from a private lender to pay off some or all of your existing federal and private student loans. The new loan usually comes with different repayment terms and a lower interest rate. If you benefit from a lower rate, it could help you save a lot on interest. It’s important to note that refinancing your federal student loans into a private student loan will cause you to lose access to some federal benefits, including student loan cancellation, forbearance, and income-tested repayment plans ( IDR).
- Consolidate Federal Student Loans. A direct consolidation loan allows you to merge multiple federal student loans into one with a single monthly payment. While this doesn’t necessarily lower your interest rate, choosing a shorter repayment term could help you pay less interest.
- Make additional loan payments. Another way to lower your interest charges is to make additional payments on your loan. To do this, consider reviewing your expenses and cutting back on unnecessary ones, like cable or a gym membership. Then reallocate those funds to pay off your student loan.
- Avoid income-driven repayment plans. If you have a federal student loan, you may be eligible for an income-based repayment plan. IDR plans allow you to make payments based on your income and family size. While this plan can lower your monthly payments, it could increase the amount of interest you pay in the long run.
- Avoid extending repayment terms. Similar to signing up for an IDR plan, taking this step could lower your monthly payment. But the downside is that extending your loan repayment term can increase the amount of interest you pay over the life of the loan.
If you choose to refinance your student loans, Credible allows you to compare the rates of several lenders.
