How to get the interest deduction on your student loan
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If you have student loans, the college payment doesn’t stop when you leave school. And paying off student loans can cost thousands of dollars in interest each year, depending on the loan balance, your interest rate, and the repayment term.
The student loan interest deduction 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 an eligible student loan and meet certain conditions. Here’s what to know about how the student loan interest deduction works, who qualifies for it, and how to claim it.
Refinancing can also help reduce interest charges on student loans, so it may be a good idea to compare rates from multiple lenders using a marketplace like Credible.
How does the student loan interest deduction work?
A tax deduction allows you to subtract a certain amount from your taxable income before calculating your tax payable. For example, suppose your taxable income is $50,000 and you qualify for the maximum student loan interest deduction of $2,500. This will reduce your taxable income to $47,500, which may reduce your federal tax payable.
You may be able to claim the student loan interest deduction if:
- You have made mandatory or prepaid interest payments on a student loan.
- The loan was for yourself, a spouse or a dependent.
- The student attended a qualifying college. A qualifying loan can be a federal or private student loan. Funds you receive from a parent or qualified employer plan are not eligible.
- Universities, colleges, vocational schools, and other accredited public and private post-secondary institutions are considered eligible schools if they qualify to participate in a student aid program administered by the U.S. Department of Education .
Only borrowers who meet all of the eligibility requirements can take advantage of the student loan interest deduction. If you are married, your filing status must be married and filed jointly – you cannot claim this deduction if you and your spouse are filing separately. And your marginal adjusted gross income (MAGI) — income before subtracting any student loan interest — must be below a certain amount.
In addition, you must meet these requirements:
- You paid interest on an eligible 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 tax return.
- You must be enrolled in an eligible school at least half-time in a program leading to a diploma, certificate or other recognized credential.
For the 2020 tax year, the amended limits on adjusted gross income to qualify were:
- $85,000 whether your filing status was single, head of household, or eligible widow
- $170,000 if your filing status was married filing jointly
Keep in mind that these limits could change for 2021 taxes, which will be due in April 2022. If you need help, the IRS has a Interactive tax assistance tool on its website to help you determine if you qualify for the student loan interest deduction.
If you’re considering refinancing as a way to reduce student loan interest costs, Credible lets you compare rates from multiple lenders.
How much can I deduct for interest on a student loan?
The maximum student loan interest deduction is $2,500. If you qualify, the amount you can deduct will depend on these factors:
- your magician
- The amount of interest you paid on your student loans
- How much interest you are allowed to deduct
Your MAGI impacts how much you can deduct – once it reaches a certain amount, the $2,500 deduction starts to disappear. For example, if your MAGI is below the phasing out threshold and the amount of eligible interest you paid was $600, you can deduct $600.
But if your MAGI is in the phasing out range, the amount of interest you can deduct will be lower.
Here are the phase-out ranges for the 2020 tax year:
- $70,000 and $85,000 whether your filing status is single, head of household 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 forbearance and tax deduction
If you have a student loan under federal forbearance, interest was waived and payments were suspended until January 31, 2022. This means that if you continue to make payments this year, they have gone directly to your main balance. Because you paid no interest on this loan, you cannot claim the student loan interest deduction for this loan.
But once interest starts accumulating again on February 1, 2022, and you resume loan payments, you may be able to claim the student loan deduction when you file your taxes for 2022.
How to benefit from the interest deduction on student loans?
If you qualify, here’s what you need to do to claim the student loan interest deduction.
- Determine how much 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 paid more than $600 in interest, your loan officer is required to send it to you electronically or by mail. Remember that you can also check your account statement or request the information from your lender if they are not required to send you the form.
- Report 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 authorized amount on line 20 of Form 1040.
Although the student loan interest deduction can help you save a few hundred dollars, the following actions 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 repay all or part of your existing federal and private student loans. The new loan usually comes with different repayment terms and a lower interest rate. If you receive a lower rate, it could help you save a lot on interest. It is important to note that refinancing your federal student loans to a private student loan will cause you to lose access to certain federal benefits, including student loan forgiveness, forbearance, and income-contingent repayment plans. (RID).
- Consolidate federal student loans. A Direct Consolidation Credit allows you to merge multiple federal student loans into one with one monthly payment. Although it won’t necessarily lower your interest rate, choosing a shorter repayment term could help you pay less interest.
- Make additional loan payments. Another way to reduce your interest costs is to make additional payments on your loan. To do this, consider reviewing your expenses and cutting out unnecessary ones, such as cable or a gym membership. Then reallocate those funds to paying off your student loan.
- Avoid income-driven repayment plans. If you have a federal student loan, you may qualify for an income-based repayment plan. IDR plans allow you to make payments based on your income and family size. While this plan may lower your monthly payments, it could increase the amount of interest you pay in the long run.
- Avoid extending repayment periods. Similar to signing up for an IDR plan, this action 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 rates from multiple lenders.