According to the Internal Revenue Service (IRS), student loan payments are tax-deductible. This federal income tax deduction allows students to deduct up to $2,500 of the interest they have paid on their qualified student loans from their taxable income.
The deduction serves as one of many tax breaks provided to students and their parents as a means to help obtain higher education.
Similar to any tax deduction, this student loan interest deduction lowers your taxable income for one year. For instance, if you are under the 22% tax bracket and claim the $2,500 deduction, this would lower your federal taxable income for that year by $550 instead.
However, the student loan interest deduction is not like many other deductions. It is claimed as an income adjustment on IRS Form 1040, which means you do not have to fill out a Schedule A to claim it.
Who Can Apply For Student Loan Interest Deduction?
If you have a modified adjusted gross income (MAGI) of less than $85,000, you can deduct your student loan interest that was paid on private or federal student loans in the following situations:
- Using the loan for qualified education expenses: Qualified education expenses include tuition, books, room and board, and coursework equipment.
- Taking out a loan for personal education: This kind of deduction is not only for graduates who are doing taxes. Overachievers who are paying their student loans while still studying may be eligible for this deduction as well.
- Taking out a loan for someone else’s education: If you applied for a loan with your name but used it for someone else’s education, you can apply for a student loan interest deduction.
- Being forced to repay the loan: If you have been legally obligated by law to repay a loan, you can apply for a deduction of any interest you have paid off.
How To Claim The Student Loan Interest Deduction
As mentioned earlier, you can claim your student loan interest deduction when filing your federal income tax return without having to itemize. The only requirement is to attach the Schedule 1 form to your tax return.
Another important form you need that can help you claim for the deduction is the 1098-E tax form. This is the form that comes from your loan provider.
In Box 1 of this form, you can see how much loan interest you were able to pay throughout the year. If you took out loans from several lenders, you will be given a 1098-E tax form from all of them. In case you did not receive this tax form via mail, you can visit the website of your lender to get a copy there.
You can calculate the amount of your student loan payment tax deduction manually using the worksheet found in the instructions of Form 1040. From there, you can input the deduction on Line 33 on your Schedule 1 and then attach the form once you send the tax return.
Are There Any Special Considerations?
As stated earlier, students at this time can subtract up to $2,500 of the interest they have paid on an eligible student loan. If less than this amount has been paid, then the deduction is going to be capped at that specific amount.
However, if you have paid more than $600 in interest for the year, you should get a Form 1098-E from your lending firm. You can also download the form from the IRS website in case you did not receive it.
As for higher-income taxpayers, the student loan payment tax deduction will be reduced or eliminated. In the year 2020, the amount for the deduction was reduced gradually if the loaner had a MAGI between $70,000 and $85,000. People cannot claim their deduction if they have a MAGI of $85,000 or more.
Do note that these figures change each year based on inflation.
What Qualifies as Interest?
There are a few types of interest that qualify for the student loan deduction apart from the interest you pay on your loans.
- Capitalized interest: This type of interest accrues and gets added on top of your loan principal if you fail to pay it.
- Credit card interest: Your interest on a revolving line of credit qualifies if you use it to pay for eligible education expenses.
- Loan origination fee: This is often a one-time fee that loan providers charge for processing new loans. This is already included in the 1098-E as of September 1, 2004. For loans before this date, you have to calculate the interest on the origination fees manually.
- Interest from consolidated and refinanced loans: If you take on a loan that primarily consolidates or refinances your existing student loans, you can use the interest payments on your new loan for the student loan payment tax deduction.
Are There Any Other Tax Breaks For Students?
There are other federal government education tax breaks for people who are still in school or are paying for qualified education expenses. There is the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit. You can also apply for the tuition and fees deduction if you do not qualify for credit with either of the two.
It is possible to claim these benefits even if you just paid for the expenses associated with student loans. Factors such as your income are useful in determining which of the benefits can help you save the most.
Similar to student loan interest deduction, you need to file your taxes jointly if you are married so you can be eligible for any of these tax breaks.
To answer the question, “Are student loan payments tax deductible?” Yes, student loan payments are tax-deductible through the student loan interest deduction program, according to the IRS.
Student loan interest deduction lets you subtract as much as $2,500 of the interest you have paid for a loan intended for higher education. The great thing about this is that you do not have to fill out a Schedule A, since the deduction can be claimed using your 1040A.
Do keep in mind that interest on student loans taken from federal agencies was suspended indefinitely to combat the coronavirus crisis last March 13, 2020. This was then extended up to September 30, 2021, by the executive order of President Biden.
This means that taxpayers who have federal loans could end up with no interest to deduct while the suspension is still in effect.