The IRS allows you to deduct up to $2,500 of interest paid per year on \u201cqualified student loans,\u201d which is any loan that was:<\/p>\n\n\n\n
- Taken out for you, your spouse or a qualifying dependent<\/li>
- Used to pay qualified higher education expenses for an eligible student<\/li>
- Used within a reasonable time period after taking out the loan<\/li><\/ul>\n\n\n\n
According to Jason Speciner, CFP, enrolled agent and the founder of Financial Planning Fort Collins<\/a>, the definition of \u201cqualified student loan\u201d is broader than you might think.<\/p>\n\n\n\n
\u201cInterest on loans that are specifically student loans obviously counts, but you\u2019re allowed to take the student loan interest deduction for any debt as long as it meets certain standards,\u201d said Speciner. \u201cIt has to be used only for education expenses [and] it has to be debt that isn\u2019t otherwise deductible.\u201d<\/p>\n\n\n\n
As an example, Speciner says that a personal loan taken out within 90 days of receiving your tuition bill would count, as long as the loan is only used for education expenses. A home equity loan, however, typically wouldn\u2019t be eligible since it is not strictly related to your education expenses.<\/p>\n\n\n\n
Wendy Marsden, CPA, CFP and principal at ProsperiTea Planning<\/a>, adds that private student loans are also eligible for the deduction and that you might be able to deduct the interest from your state tax as well.<\/p>\n\n\n\n
\u201cMany states have what are called \u2018piggyback taxes\u2019 that say that whatever your federal income is, that\u2019s what they\u2019ll use as your state income tax base,\u201d said Marsden. \u201cIn that case, if it\u2019s deductible at the federal level, then it\u2019s deductible at the state level too.\u201d<\/p>\n\n\n\n
Marsden emphasized that it is only the interest portion of your student loan payment that\u2019s deductible. Some of each payment goes toward the principal of your loan, and that portion isn\u2019t deductible.<\/p>\n\n\n\n
However, one of the big advantages of the student loan interest deduction, according to Speciner, is that it\u2019s an above-the-line deduction, meaning that you don\u2019t have to itemize deductions in order to claim it.<\/p>\n\n\n\n
\u201cThat\u2019s the beauty of this thing,\u201d said Speciner. \u201cIf you look at the typical taxpayer who\u2019s within the income range that\u2019s allowed to claim the deduction, they\u2019re typically not itemizing deductions. But here, they\u2019re still allowed to take it.\u201d<\/p>\n\n\n\n
The bottom line is that if you\u2019re repaying any debt taken out exclusively for education expenses, the student loan interest deduction can help ease the burden of those payments by reducing your tax bill.<\/p>\n\n\n\n
Do you qualify for the student loan interest deduction?<\/h2>\n\n\n\n
The downside of the student loan interest deduction is that not everyone will qualify. There are several criteria you have to meet.<\/p>\n\n\n\n
First, as explained above, the interest has to be paid on a \u201cqualified student loan,\u201d taken out for you, your spouse or a qualifying dependent.<\/p>\n\n\n\n
Second, you must have personally paid the interest during the tax year in question, and you must be legally obligated to pay that interest. One of the implications here is that if you are a parent making payments on your child\u2019s student loan and you aren\u2019t a cosigner on it, you are not allowed to deduct those interest payments because you are not personally obligated to make them.<\/p>\n\n\n\n
\u201cFor a personal example, I told my son that I would pay his student loans if he got [a grade point average of] over a 3.0,\u201d said Marsden. \u201cHe did that, so now those loans are in his name, but I am paying them, and I can\u2019t take the deduction even though I\u2019m paying the interest.\u201d<\/p>\n\n\n\n
You also can\u2019t claim the deduction if you are married but file taxes separately. You must either be a single filer or file jointly as a married couple<\/a>, and you must not be claimed as a dependent on anyone else\u2019s tax return.<\/p>\n\n\n\n
Finally, the deduction is phased out once your income reaches a certain point. For single filers, the phaseout begins when your Modified Adjusted Gross Income (MAGI) reaches $65,000, and the deduction is eliminated completely once your MAGI reaches $80,000. For married couples filing jointly, the phaseout runs from $135,000 to $165,000.<\/p>\n\n\n\n
\u201cIt\u2019s almost always income that keeps people from being able to claim the deduction,\u201d said Speciner. \u201cI have clients come in with $5,000 of interest paid during the year, and I have to tell them they can\u2019t deduct it because their income is too high.\u201d<\/p>\n\n\n\n
On the other hand, Marsden points out that there are a few sweet spots where the deduction can be incredibly valuable.<\/p>\n\n\n\n
\u201cTeachers are a really good example of people who can benefit from the student loan interest deduction,\u201d she said. \u201cAnybody with a medium- to low-earning career, or anyone who is early in their career, can benefit from it.\u201d<\/p>\n\n\n\n
How to calculate your student loan interest deduction<\/h2>\n\n\n\n
In a moment, you\u2019ll learn how to report the exact right amount of student loan interest you paid for tax purposes, but first you might want to know ahead of time how much you stand to save.<\/p>\n\n\n\n
Here\u2019s a process that will help you estimate the value of your student loan interest deduction:<\/p>\n\n\n\n
![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/01_1.png\")
First, make sure you\u2019re not above the income limits. For single filers, that\u2019s a MAGI of $80,000, and for joint filers, it\u2019s a MAGI of $165,000. Click here<\/a> for an overview of how to estimate your MAGI. If you are over those limits, you won\u2019t be able to claim the deduction.<\/li>![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/02_1.png\")
For each individual student loan, multiply your current balance by your interest rate to get the approximate amount of interest you\u2019ll pay during the year. For example, if you have a $10,000 loan with a 6.8% interest rate, you can multiply them together to get an estimated annual interest payment of $680.<\/li>![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/03_1.png\")
Add together the estimated interest for each loan to get the total amount of interest you expect to pay across all your student loans.<\/li>![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/04_1.png\")
Cap that number at $2,500.<\/li><\/ul>\n\n\n\n![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/05_1.png\")
If you\u2019re single and your MAGI is between $65,000 and $80,000, or if you\u2019re married and your MAGI is between $135,000 and $165,000, you\u2019ll have to calculate your phaseout. To do that, first subtract the bottom MAGI limit ($65,000 for singles, $135,000 for couples) from your estimated MAGI, then divide that result by either $15,000 if you\u2019re single or $30,000 if you\u2019re married filing jointly. Here\u2019s an example:- You\u2019re married, filing jointly and your estimated MAGI is $150,000.<\/li>
- Subtract $135,000 (the bottom MAGI limit) from $150,000 to get $15,000.<\/li>
- Divide $15,000 by $30,000 (single filers would divide by $15,000).<\/li>
- That result is 0.5.<\/li>
- Multiply 0.5 by the total interest you calculated in Steps 3 and 4 to determine the final amount you\u2019ll be able to deduct.<\/li><\/ul><\/li>
![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/06_1.png\")
Multiply the amount of interest you\u2019re able to deduct by your federal tax rate to get your estimated savings. For example, if you are in the 22% tax bracket and you can deduct $2,500 in student loan interest, you stand to save $550 at tax time. If you\u2019re not sure what your tax rate is, you can use this tool from TurboTax<\/a>.<\/li>![\"\"](\"https:\/\/web.archive.org\/web\/20201022000428im_\/https:\/\/www.magnifymoney.com\/blog\/wp-content\/uploads\/2018\/08\/07_1.png\")
If the interest is deductible for state income tax purposes as well, you can multiply your state tax rate by the amount of your eligible interest to calculate your additional savings.<\/li><\/ul>\n\n\n\nHowever, there are a few other factors to consider.<\/p>\n\n\n\n
According to the IRS, the interest is only deductible to the extent that the loan was used to pay qualified education expenses, and those expenses are reduced by other money that was received tax-free for that same purpose, including:<\/p>\n\n\n\n
- Employer-provided education assistance<\/li>
- Tax-free distributions from a 529 plan or Coverdell ESA<\/li>
- Savings bond interest used for education<\/li>
- Scholarships<\/a> and grants<\/li>
- Veterans\u2019 educational assistance<\/li>
- Other tax-free payments used for education, aside from gifts or inheritances<\/li><\/ul>\n\n\n\n
In other words, if you used any of those sources to pay for education expenses, and you think that as a result, your entire student loan balance may not have gone toward qualified education expenses, you may want to consult with a CPA before deducting all of your student loan interest.<\/p>\n\n\n\n
On the other hand, the IRS does allow you to count a few additional expenses as interest for the purpose of the student loan interest deduction:<\/p>\n\n\n\n
- Loan origination fees<\/li>
- Capitalized interest, which is interest that has been added to the principal of the loan<\/li>
- Interest on credit card debt, as long as that debt was used solely to pay for qualified education expenses<\/li>
- Interest on refinanced and consolidated student loans<\/a><\/li><\/ul>\n\n\n\n
Steps to claiming your student loan interest deduction<\/h2>\n\n\n\n
For the most part, claiming your student loan interest deduction is fairly simple. The biggest potential hang-up is simply figuring out exactly how much interest you paid.<\/p>\n\n\n\n
In general, any lender that received $600 or more in interest payments from you during the year must send you a Form 1098-E, which will specify exactly how much interest you paid. However, that form might not include things like loan origination fees or capitalized interest, which would also be eligible for the deduction.<\/p>\n\n\n\n
You may not always receive a Form 1098-E, either because you didn\u2019t pay at least $600 in interest or because your lender didn\u2019t mail it out, in which case you may need to do some digging.<\/p>\n\n\n\n
\u201cThe lender is going to have a statement or a website where you can see how much interest you paid during the year, as well as other relevant information,\u201d said Speciner. \u201cAnd if you used another type of debt, like a personal loan, you won\u2019t get a Form 1098-E, and you\u2019ll definitely have to use the lender\u2019s records at that point.\u201d<\/p>\n\n\n\n
Once you have that information, Speciner says it\u2019s simply a matter of providing it to your tax professional or entering it into the tax preparation software you\u2019re using. Your allowed deduction will be calculated and added to your return.<\/p>\n\n\n\n