Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.

Student Loan Interest Deduction

When you use student loan funds to finance your education, if you are eligible, the IRS allows you to claim qualifying expenses that you pay with those funds towards educational tax credits. A tax deduction is also available for the interest payments you make when you start repaying your qualified education loans. Here’s more about how student loans and educational expenses can affect your taxes. Even though the IRS is a federal agency, private student loan interest payments are still eligible for tax deductions.

How does the student loan interest deduction work?

Get unlimited advice, an expert final review and your maximum refund, guaranteed with Live Assisted Basic. In fact, this tax break could allow you to deduct up to $2,500 of paid interest from your annual taxable income. You can claim the full deduction (up to $2,500) if your MAGI is below $70,000 ($140,000 for joint filers). You also must meet income limits to claim the deduction, which we’ll get into shortly. Your lender reports your interest payments over a certain amount to the IRS on a tax form called a 1098-E, and should provide you with a copy, too.

How much is student loan interest?

Federal student loan rates for the year between July 1, 2023, to June 30, 2024, are: Direct subsidized and unsubsidized loans for undergraduates: 5.50% Direct unsubsidized loans for graduates or professional borrowers: 7.05% Direct PLUS loans for parents and graduate or professional students: 8.05%22.

Like any other tax deduction, it lowers your taxable income, and in some instances could lower your tax bracket. If you don’t receive a student loan interest deduction document, ask your student loan servicer or private lender to send it to you. A copy of the form, as well as details on how much interest you paid, may also be available in your online account portal. The state instructs those taking the credit to save canceled checks and keep a log of student loan payments made. Of course, in this modern era of web payments, this can be as easy as going into your student loan servicer’s dashboard and printing out your loan activity for the year.

What Other Tax Information Might Apply to Students?

Student loan interest is deductible if your modified adjusted gross income, or MAGI, is less than $70,000 ($145,000 if filing jointly). If your MAGI was between $70,000 and $85,000 ($175,000 if filing jointly), you can deduct less than than the maximum $2,500. Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. This means that you don’t have to fill out a Schedule A, which is used to itemize deductions, to claim it. Minnesota offers a
nonrefundable credit of up to $500 per resident who made payments on their own
student loans during the year (so paying off someone else’s student loans
doesn’t count).

  • You get the benefit of the full deduction to which you are entitled.
  • And, many of them neglect to check the tax credits and student loan interest deductions that can help them save a lot of money, especially after graduation.
  • At the end of each year, your servicer will send you by mail or through its website Form 1098-E, which details how much interest you have paid on your student loan.
  • You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions.
  • You don’t have to itemize loan interest payments to claim the deduction — but we’ll get to specific eligibility requirements and how to claim the deduction in a minute.

These forms might come from your previous employers, payers who you provided services to, your college, loan servicers, your bank, and any retirement accounts you have set up. Below, we’ll explore the student loan interest deduction and how you can minimize your taxes  while you’re still in college. I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide. If your employer offers student loan payment as a benefit, you cannot claim any amount they paid toward interest that was excluded from income. You may have to look at your payment history to see how much interest you paid versus how much was paid with pre-tax employer benefit funds to determine how much you can claim. If you’re struggling to make your student loan payments, proving partial financial hardship can help you lower them.

Should I Make Only Minimum Interest Payments So I Can Prolong My Eligibility?

However, every charge on the card must be for school purposes, otherwise you can’t deduct anything. You can also encourage family and friends to contribute toward your student loan payments via the Gift of College platform and crowdfunding tools. For more on how interest accrues on your debt, see our guide to how student loan interest works. And to speed up your repayment, check out our tips on paying off your student loans more quickly. If you plan on using the standard deduction, you don’t have to worry about missing out on the student loan deduction — you can take both.

Student Loan Interest Deduction

Yes, the interest portion of your student loan payments is tax deductible in 2022. However, you cannot deduct the principal portion of your loan payments (the amount that goes toward paying down your original loan balance). If you pass the qualifications above, you probably want to know how the student loan interest deduction works.

Not sure which deductions or credits to take?

To qualify to deduct your student loan interest, you need to understand the parameters set by the IRS. The student loan interest deduction is an above-the-line tax deduction, which means the deduction directly reduces your adjusted gross income. Deductions differ from tax credits — which directly reduce the taxes you owe. If you’re still in school, you may be eligible for educational tax credits — more about this later.

The credit amount will be different for every student, and unlike many other states, you must apply for the credit, and not every applicant will be awarded the credit. Interested student loan borrowers have until September 15th of each year to apply for the credit with the Maryland Higher Education Commission. The actual cash value to you of a tax deduction is the amount of the deduction multiplied by your marginal tax rate. So, if your marginal tax rate is 10% and you receive a $500 deduction, the actual cash value to you of that credit is $50. Some states go above and beyond for their student loan borrowers by providing a student loan interest credit.

If you qualify for the student loan interest deduction, taking it can be worthwhile. As an above-the-line deduction, it lowers your adjusted gross income. Follow along as we explore how the student loan interest tax deduction works, who qualifies and how to claim it.

  • More importantly, credit cards tend to charge a much higher interest rate than student loans.
  • Despite this issue, your eligibility for Form 1098-E is based on interest paid over all of your outstanding loans.
  • You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year.
  • However, this isn’t true — you can deduct interest payments made toward any type of student loans, both federal and private.

Despite this issue, your eligibility for Form 1098-E is based on interest paid over all of your outstanding loans. Although getting Form 1098-E in the mail is an eligibility indicator, it does not actually mean you are officially eligible for the tax deduction. To receive the form, you must have paid at least $600 in interest (remember, the maximum deduction is $2,500).

To understand how much that will ultimately save you on your tax bill, multiply the amount student loan interest you’re eligible to deduct by your tax bracket. On the other hand, loans from someone who is related to you or loans from a retirement plan aren’t eligible for the student loan interest deduction. Another point to bear in mind is that the student loan interest deduction is available to both student borrowers and parent borrowers.

Similar to the student loan interest deduction, the IRS imposes specific eligibility requirements and income limitations for the AOTC. For example, you can deduct out-of-pocket medical expenses that exceed 7.5% of your AGI. So lowering your AGI by claiming the student loan interest deduction can allow you to deduct more of your medical expenses.

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